Last month, on my way from midtown Manhattan to JFK Airport I saw a large billboard on the side of the expressway that had just seven words on it. “The Future of Banks is No Banks”. This must keep many bankers awake at night.
There were no other words on the billboard to show who sponsored this, but I am sure that it refers to the FinTechs, companies that use technology to open new revenue opportunities and make financial services more efficient and personal. They are usually startups that see an opportunity to service financial consumers without the need to go though banks by using technologies like social, mobile, analytics and cloud. This is a growing market, which has attracted a lot of venture capital and crowd sourcing investment. I blogged about this last August when Forbes reported that investments in FinTechs had quadrupled from just over $3 billion in 2013 to over $12 billion in 2014. Investments in FinTechs are expected to double in 2016.
The established financial companies are well aware of this threat and are taking actions to leverage the FinTechs. CB Insights posted a blog on how major banks like BofA, Citi, Goldman Sachs, Morgan Stanley, JP Morgan, and Wells Fargo are making overlapping investments in FinTech companies. Some common areas are payments technology around mobile payment, OtoO (Online to Offline) payment networks, data analytics that pertain to financial services, personal finance technology, and Peer to Peer interactions based on a new technology called blockchain.
Secure payment methods are among the more popular services. When I was in Indonesia last month, the largest bank there BCA (Bank Central Asia) had developed a mobile app called “KlikPay” which enables a customer to pay through his mobile phone and assures themerchant that the customer has sufficient funds in his BCA account. By using KlikPay, BCA can piggyback on many of the online shopping sites and Online to Offline services like Go-Jek motor scooter taxis and FoodPanda that delivers takeout food. This is still a bank service. But there are also many non-bank payment systems.
Probably the most successful non-bank mobile payment app is M-Pesa (M for mobile and Pesa which is Swahili for money), which was launched in 2007 by Vodafone for Safaricom and Vodacom. Initially launched in Kenya and Tanzania, it has since expanded to South Africa, Afghanistan, India, and parts of Eastern Europe. M-Pesa is a bankless service. M-Pesa customers can deposit and withdraw money from a network of agents that includes airtime resellers and retail outlets acting as banking agents. Using their mobile phone M-Pesa customers can easily transfer money and pay for goods and services using a PIN- secured SMS text message. Users are charged a small fee for sending and receiving funds.
The best-known use of non-bank currency is bitcoin where transactions are made with no middle men – meaning, no banks! There are no transaction fees and no need to give your real name. There are exchanges where you can buy and sell bitcoin in different currencies. Since there are no ties to any country or subject to any regulations or transaction fees, it is cheap to use. Each bit coin transaction is recorded in a public log by wallet ID but the names of buyers and sellers are never revealed which makes the transactions private. Consequently it has become the currency choice for illicit transactions.
While bitcoin is not a favorite of Banks, the technology behind Bitcoin, known as blockchain has become of great interest to the major banks and technology companies like Accenture, Cisco, Fujitsu, Hitachi, IBM, and Intel. Blockchain is a distributed ledger as opposed to a central ledger that is currently used in banking transactions. It is a way to make and verify transactions on a network instantaneously without a central authority.
I am not ready to agree that the future of banks is no banks, but I am sure that financial services will need to change to be more efficient and more personal if they want to continue to be the intermediary in financial transactions.