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Over the last 10 years, mobile phones have introduced the Internet into all our economic and social interactions. Already, in places such as China, we see mobile apps like WeChat and Alipay dominating more than 90 percent of the payments market. They are not competing for profits, but to learn their users’ likes and dislikes, and to understand their habits and financial status. This knowledge is used to build a user profile that is then sold to advertisers or translated into lending.
China is becoming a cashless society, using mobile apps that reduce financial institutions to mere payment providers. Banks are becoming far removed from their customers, without any knowledge of those customers’ needs or the ability to engage with them. It’s easy to extrapolate that payments will be integrated into any digital social interaction in which we will engage in the future.
Thus our future banking providers will have to hitchhike on top of social networks, wallets, messaging apps and mobile operating systems. These will become distribution networks for their services. Banks will be competing to provide the best digital banking experience for a generation that will not understand the concept of physical banks.
One of the biggest impacts of using Internet-based distribution networks to access your consumer base is that it will reduce the number of intermediaries that need to participate in a transaction. This is not to say that middlemen will entirely disappear, but in a world where any two entities can communicate P2P on public internet rails, the concept of correspondent banking will be transformed.
We already see the power of such networks in places like Kenya, where it took a branchless banking service called M-Pesa only three years to become the most successful mobile banking service in the developing world. They did this simply by connecting millions of consumers with their bank through SMS.
Another impact will be a reduction in the friction inherent in switching banks. Think about how easy it is for a cab driver to switch his or her entire personal business from Uber to Lyft on a daily basis. This opportunity for an individual to “exit” the network puts big pressure on traditional business models. It gives the advantage to intermediaries that are able to connect with consumers on a personal level, give them a voice and create loyalty that reduces “exit.”
Implementing distributed systems
As these new distribution networks evolve, they become more efficient. We can see an example of this in Blockchain-based networks like Bitcoin and Ethereum, which provide P2P transactions that are carried out without any single network operator taking a fee. These networks evolve slowly because of their governance structure, but are displaying a significant ability to coordinate large numbers of people and organizations by using economic incentives. This aligns all parties’ interests in maintaining the network and improving it. Imagining new types of banks that operate on top of a decentralized ledger could lead to true competition in banking and introduce opportunities for financial innovation.
In a world where payments are cheap, instant and 24/7, these new crypto-banks will be trusted intermediaries that accept deposits from customers and manage those customers’ capital. But unlike traditional banks, they will not lock users into a closed garden of financial services. The value they provide to their customers will be measured in terms of their ability to package solutions into digital products. They will form a marketplace of banking services, ranging from lending and wealth management to insurance.
Offering a banking product on a public distribution network also changes the flow of information. Today, when consumers provide their credit card number and in return receive consumer credit, they are locked to a single credit provider. But when customers provide proof of their identity, those customers share an attestation of their financial conduct. They are also giving their location in order to reduce fraud, and informing the retailer of the best way to reach them for matters of customer care and digital receipts.
Standards for digital identity will create new models for evaluating risk, which will allow connecting credit givers to credit takers and remove reliance on centralized credit scoring providers. Already, social and mobile apps are offering better data privacy controls for sharing information with third parties as a result of public demand. Better encryption-based privacy controls can empower users to choose their credit providers by sharing more of their information and securely recording the full context of each transaction.
As society becomes less reliant on cash transactions and more dependant on public Internet rails, capital management and banking compliance will look very different, with a bigger emphasis on decentralized cryptographic systems. The cost of banking IT will be reduced by using open-source software and improving its resilience by leveraging its distributed nature. The first technology-oriented regulators will create internet standards for regulation and pave the way for all the rest. This will allow the providing of cryptographic proof of solvency or proof of your identity. Companies will be able to operate with greater transparency and consumers consume with greater privacy.
Eventually, fintech companies and banks will become more and more alike. As user acquisition costs begin to rise for banks, they will begin to think more about maximizing the lifetime value of each customer and becoming more efficient. Fintech companies will become, well… just “banks,” and we will soon realize that there's no escaping that word, no matter how much tech companies will try.