Key fintech terminology
The financial crisis of 2008 was a turning point for the financial services industry. A technological rift and growing consumer distrust of the banks set the scene for the first wave of fintech disruption, now commonly known as Fintech 1.0.
What followed was a torrent of fintech companies using software to offer up the same financial products as were traditionally offered by banks.
Over time a new generation of fintech companies emerged, further blurring the lines of the financial services industry. These Fintech 2.0 companies fall into several categories. But what unites them is that they are either facilitating non-financial organisations to offer financial products or they are offering these products themselves. And they are doing so by embedding financial products into their existing solutions.
In other words, whereas in the past they would have relied on out-of-the-box third party solutions, today they can offer financial services themselves as part of the native customer experience.
With so much change and disruption we thought it was time to create a blog post with a Fintech 2.0 glossary.
The advent of embedded finance has led to the growth of payment-as-a-service (PaaS). Payment solutions for ecommerce have been available for some time – just look at the phenomenal stories Stripe or Square. But up until recently, the solutions have been served as a one size fits all product.
Payment-as-a-service offers customers a range of microservices. So now an online retailer can build, order and deliver a package of microservices to create a set of offerings that are relevant to its audiences.
And that means a far more customised experience can be offered up in much less time and with fewer resources required than in the past.
An additional benefit to companies which uptake PaaS is a revenue model which works in their advantage. Whereas traditional payment companies would take a percentage of each transaction, PaaS providers tend to charge a flat subscription fee for their APIs. This significantly lowers the customer acquisition cost as companies scale over time.
Infrastructure-as-a-service has taken the IT industry by storm over the past decade. In the past, companies looking to manage and store their data would have to sign lengthy contracts with hardware vendors. They’d need to estimate what their data usage needs would be for the whole duration of that contract to ensure they don’t under provision.
Then came along the likes of Microsoft Azure and Amazon Web Services, which enabled companies to store their data without on a pay-as-you-consume basis. This brought the benefits of scalability and flexibility, without the need to worry about vendor lock-in.
Similar change to the operating model of the banks has been slow to arrive. But the combination of new regulation and legacy banking infrastructures means the sector is ripe for disruption.
A new breed of infrastructure companies is emerging.
By collaborating with banks, they are able to offer financial products and services which are ready to go. And that means companies looking to offer up such services no longer need to go through the financial and time investments. Nor do they need to jump through the various licencing and regulatory hoops. Instead, they can affordably tailor their service and deploy it within days, if not hours.
Think of some of the biggest companies in the world today. Facebook is a content platform. Yet it creates no content. AirBnb is the world’s largest real estate provider. But it owns no property. Uber is the largest taxi company even though it doesn’t have its own fleet of cars. You get the picture.
Consumer industries have organised themselves into platforms over the past decade or so. But not the financial services industry.
Banking services have, up until recently, been offered solely by banks in closed loops. While restrictive, legacy regulation also creates a barrier to entry. So there has been little incentive to go the platform route. Another reason banking-as-a-platform has been slow to emerge is that banks have traditionally had the upper hand when it comes to calculating risk and reflecting that expertise within a product.
A third reason banking-as-a-service is only gaining traction now is trust. Even with the 2008 financial crisis, the big banks, with their established reputations, have been hard to compete with for consumer trust.
Banking-as-a-platform is beginning to take hold.
That’s because new powerful technologies allow for new entrants to make credit underwriting decisions effectively. Meanwhile new regulation has facilitated an unbundling of financial services and products which the banks used to have control over. Open banking means that third parties can replace the banks as the providers of such services. Competition has opened up. And this leaves the banks at an “adapt or die” juncture.
As we look to the future of banking-as-a-service, we’re likely to see new banking infrastructure API marketplaces connecting customers to various banks and financial products.
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