Ever since the world’s first continuously operating bank was established in Renaissance Italy, the financial sector has enjoyed its role because of the sole provider of monetary service and therefore the only conduit connecting consumers with markets. For a previous couple of decades, money would travel during a closed-loop system between banks, insurance companies, brokerages, clearinghouses, and other established financial institutions.
That all began to break when Paypal emerged, allowing its customers to shop for off eBay before expanding to a more comprehensive suite of monetary services and minting a top tier of entrepreneurs within the process.
In the following decades, the word “fintech” would become synonymous with the slew of startups chipping away at the dominance of monetary institutions. Whether Stripe for payments, Robinhood for investment, or Lemonade for insurance, individual functions once offered solely by the banks have morphed into multi-billion dollar businesses standing on their own. rather than saving, trading, and borrowing from traditional institutions, a growing movement of consumers is instead channeling their funds into a parallel ecosystem of apps.
These super consumers have taken to fintech not as a replacement for financial institutions, but as a supplement. they’re less likely to simply accept unnecessary fees and long settlement times as “the cost of doing business.” As a digitally native generation, super consumers want their financial experience to include frictionless services, fluid interfaces, and customer-centric brands.
It isn’t just fintech—tech companies across other verticals also are making a robust push into financial services. Uber unrolled Uber money last year to equip their drivers with key financial services in-app. Companies like Plaid, recently acquired by Visa for $5.3 billion, and startups like Unit Finance have ushered within the era of fintech-as-a-service by integrating financial services into existing platforms.
The best financial institutions are leveraging cutting-edge technology to not only retain their existing customers but unlock entirely new value chains. By embracing a customer-first culture, transforming their infrastructures, and innovating at the intersections of tech and finance, institutions can secure their positions because of the top choices for super consumers.
Banks and financial institutions can ride the fintech wave with blockchain technology
Initially conceived as a peer-to-peer system for sending and receiving currency, blockchain technology has evolved to encompass a wider sort of financial functions. The movement to recreate financial services on the blockchain has given rise to a vibrant ecosystem referred to as “Open Finance,” “Decentralized Finance,” or “Defi,” for brief. within the last two months, Open Finance has exploded, tripling the worth of deposits locked across several lending, savings, investments, and derivatives platforms.
While the Open Finance sector largely consists of traditional services with a blockchain twist, it’s also spawned a completely new class of monetary applications, like automated market makers and liquidity pools. These intelligent agents provide liquidity during a sort of market and use algorithmic pricing to dynamically suit prevailing market conditions. even as algorithmic trading opened novel opportunities for traders, quants, and financial institutions, so too the expansion of automated market makers is introducing new ways to get yield.
In their quest to modernize their systems and regain their competitive advantage, institutions could look to the tremendous talent and innovation evolving within the Open Finance sector.
Moreover, these platforms are built on public networks that function ideal “testing grounds” for the technology. a number of the use-cases that have extended beyond the test tubes and into primetime usage include:
Micro-Payments: whenever a MasterCard is swiped, regardless of the quantity spent, the merchant’s bank has got to pay an interchange fee to the issuing bank to hide the prices related to processing the payment. This makes small transactions unfeasible and effectively shuts institutions far away from the ‘long-tail’ of finance. Integrating distributed ledger technology (DLT) into payment rails allows for the creation of a market with zero transaction fees and minimal time delays.
International and cross-banks money transfers: In an era of instant communication, the lag involved in international money transfer looks like a relic of an archaic past. Even within countries, transfers between banks usually take up to 2 business days thanks to the incompatibility of the banks’ systems. the method becomes even more resource-draining because of the number of banks involved during a transaction increases. Visa has begun to overcome these limitations by reducing the latency and costs of worldwide bank-to-bank transfers with its B2B Connect payment network. The B2B Connect network is capable of settling cross-border payments during a matter of minutes, as against days, using DLT for clearing and settlement.
Peer-to-Peer lending: P2P lending platforms allow borrowers to crowdsource capital by tapping into the community of lenders rather than getting to the bank for a loan. Yet P2P lending isn’t limited to currencies only. The Tel-Aviv stock market recently launched a lending platform for securities that harnesses the benefits of DLT, like direct peer-to-peer transactions and immutability.
What was once the domain of a get few investors are drawing during a new generation of financially-savvy, retail-orientated super consumers, especially with recent changes to the accredited investor definition? These super consumers are actively involved in trading assets, removing loans, issuing and settling financial products, and doing anything they will extend their excess returns.
Institutions looking to maximize this explosion in financial innovation might be well served by incorporating peer-to-peer systems in their business models, all fully KYC’d under the quantity live. Peer-to-peer finance and therefore the disintermediation it brings could contain the key formula to onboarding super users with less friction and more seamless user experience, allowing scale. The technology has ripened and is prepared for primetime, especially for those that understand which technology to settle on or with whom to consult.
(With inputs from NASDAQ)