“FinTech” has taken the financial industry by storm. It has revolutionized many financial services and products that used to be the exclusive domain of banks and brokerages. The latter have slipped in market share and reputation due to legacy banking and outdated technical infrastructures. And the innovation train has left the station.

New financial technologies like bitcoin (cryptocurrency) and blockchain (distributed ledger) will take some time to reach mainstream adoption. However, common bank transactions such as payments, borrowing, lending foreign exchange transfers and wealth management are already building up momentum and the FCA (UK Financial Conduct Authority) is doing its fair share to make these new financial technologies available to the general public as soon as possible.

For some, FinTech might be bewildering with many new terms, concepts and financial products – such as bitcoin, blockchain, neobank, robo-advisory and Ethereum. The potential for losing market share to start-ups is just one of the reasons why big banks are pouring money into their own technology, as well as start-up ventures.

“Digital disruption has the potential to shrink the role and relevance of today’s banks, and simultaneously help them create better, faster, cheaper services that make them an even more essential part of everyday life for institutions and individuals” wrote Julian Skan, Managing Director of Financial Services at Accenture, in a 2015 report. “To make the impact positive, banks are acknowledging that they need to shake themselves out of institutional complacency and recognize that merely navigating waves of regulation and waiting for interest rates to rise won’t protect them from obsolescence.”¹

Many of the traditional banks and brokerages have had success with their own innovations, but for the most part it has been “copy and catch-up”. It’s only when the newcomers and challengers shake up an industry that the incumbents react, either denial at first – FinTech will eventually fade – or simply adopt a “crush the competition” strategy. Neither has worked, as more and more FinTech start-ups are entering the financial industry and disrupting every financial product or service available. This has benefitted retail investors and mass consumers alike, as now the entry barrier to investing and trading has been lowered to allow a greater number of average consumers to invest any surplus funds they may have sitting around in a savings account gathering dust.

With interest rates very low and tending into the negative zone (meaning we will eventually pay to store our savings at the bank), leaving one’s savings in a savings account is simply “economic nonsense”. However, the biggest challenge for the average consumer is access to wealth managers and financial markets, as well as financial knowledge and experience. Most traditional wealth management firms have a £500,000 minimum deposit requirement and in return they offer their standard fees of “2% + 20%” (2% management fee + 20% performance fee) for the management of your portfolio.

Innovative FinTech “robo-advisory” companies offer the same wealth management services online and have lowered the minimum deposit requirement to £10,000 for a fee structure of a mere 0.75% or less. Countless other “robo-advisors” have sprung up and are offering even lower minimum deposits and fees, as well as “zero-robos” which are offering their services with zero percentage fees (presumably hoping to build up a large customer base and huge transaction volume as a new business model).

Information Overload

In the new era of superfast connectivity and digitization of everything, the biggest beneficiary is the millennial. But at the same time, the millennial is its weakest victim.

This dichotomy can be very easily explained. On the one side, we have the incredible power of knowledge combined with efficiency literally in the palm of our hands – smartphones – and on the other side, we are flooded with information, cascading down on us like a waterfall. The benefits are easy to see, the risk not so.

Having easy and instant access to a universe of knowledge has given the average person an incredible advantage over his “analogue predecessor”. If anything, the speed and volume at which information is consumed is simply “mind-boggling” and something we take for granted.

Mobile and Mobility

Throughout history, there have always been times when innovation has unleashed an industrial revolution. The fourth industrial revolution is already taking place and in FinTech, the financial revolution has already started and is taking the financial industry by storm.

What at first appeared to be just a buzzword, FinTech is now fully entrenched in society and millennials are jumping the train from legacy banking. It is not only banking that is being disrupted, it is also the financial industry that is being revolutionized. And the main reasons for this are the mobile and mobility.

For millennials, being without their smartphone or at least connected online through a tablet, TV or laptop is inconceivable. It has reached the point of addiction. Just about everything is done on the smartphone, from checking e-mails and surfing the internet to posting on social media and banking.

This inevitable transition from analogue to digital has returned the decision-making process to the individual, because we are no longer dependent on third parties such as consultants and advisors to give us advice (“disintermediation”). Just about everything can be searched and researched on the internet and almost everything can be ordered online.

According to recent statistics, in 2017 there are an estimated 2.3 billion smartphone users worldwide and this number is expected to rise to 2.9 billion by 2020. It is estimated that by 2020, more than 70% of the world population will be using mobile phones, of which globally 6.1 billion will be smartphones.²

The “Ericsson Mobility Report”³ details the trends and forecasts of the future, including the Internet of Things (IoT) and the impact of ultrafast broadband and 5G networks around the globe.

Network speeds and mobile usage penetration hold the key to technological advancements across the globe, because of network effects – the more that join, the more useful that network becomes. Smartphones have played a key role and will have an even greater impact in the FinTech world, because they will enable the unbanked/underbanked to be served and this financial inclusion will significantly expand the global financial markets.

User Experience and Digital Utility

User experience is the single most important aspect of digital disruption. Any website, app or platform that is successful is the result of a carefully designed and crafted user experience. The likes of Uber, Airbnb and Amazon have succeeded beyond their wildest dreams because they have focused strongly on their user experience.

There are five factors that greatly influence user experience:

• Fast – app and platform users value speed above all.
• Fluid – navigating around the user interface must be easy and smooth.
• Frictionless – anything that slows down or causes friction must be removed.
• Seamless – being able to switch seamlessly from one device to another.
• Intuitive – everything must be instinctive, self-explanatory and easy to use.

“Utility” is an economic term introduced by Daniel Bernoulli which refers to the total satisfaction received from consuming a good or service.⁴ When all of the above elements are combined into a simple – and at the same time superior – user experience, the result is “digital utility”.

Artificial Intelligence, Analytics and Big Data

Because of regulatory compliance, banks and financial institutions hold more data on financial transactions from around the globe than the financial markets themselves. In addition, these same banks and financial institutions store vast amounts of data from the suppliers, vendors, partners, customers and their own internal data and transaction infrastructures. Think Citibank, Goldman Sachs, HSBC, UBS, Credit Suisse, JP Morgan, Morgan Stanley, Blackrock, Barclays, Deutsche Bank… the list goes on and on.

So, what do these big financial companies do with all this data?

Well, they use it for their own best interests and profits. Although most of it is transactional data, most banks and financial institutions consider all their data proprietary. And for good reason too; after all, big data is power and profits.

The disruption and shrinking margins brought about by FinTech newcomers, as well as regulatory compliance, will compel those same banks and financial institutions to gradually start releasing and distributing their data through open APIs and third parties.

The year 2018 is set to be a game-changing year for retail banking. As the PSD2 (Revised Payment Service Directive) becomes implemented, banks’ monopoly on their customer’s account information and payment services is about to disappear.

In short, PSD2 enables bank customers, both consumers and businesses, to use third-party providers to manage their finances. In the near future, you may be using Facebook or Google to pay your bills, making P2P transfers and analyse your spending, while still having your money safely placed in your current bank account. Banks, however, are obligated to provide these third-party providers access to their customers’ accounts through open APIs (application program interface). This will enable third-parties to build financial services on top of banks’ data and infrastructure.⁵

The gradual use of big data will enable the financial industry to become more efficient and at the same time more profitable. It will enable all parties involved to analyse and use this data to build better data infrastructures, become more efficient and give third-party developers a platform on which to design and build useful applications.

Digital banks and robo-advisors have led the way in integrating big data and analytics into their platforms, but there is still a long way to go. WealthTech innovators – such as digital investment managers, hybrid trading and blockchain platforms of all sorts – are pushing forward innovative financial products and services that were not even in existence a couple of years back. Innovative trading platforms and apps that incorporate artificial intelligence, machine learning and big data will have the comparative advantage over their peers, as they will be able to provide a more integrated service to their platform users.

Retail investors will be offered all the tools, information and data that the traditional big banks and brokerages have used for the past several decades in the simplified technological format of an app on a smartphone. Digital disruption in finance will enable millennials to keep more of their financial gains and at the same time be more in control of their own finances.

Artificial intelligence, machine learning and big data analytics are the new frontiers of FinTech, and millennials will be at the forefront of digital disruption in the financial world.