Fintech: Disintermediating the industry

Issued by Fedgroup Financial Services
Johannesburg, Apr 28, 2017

The smartphone has certainly been one of the most important drivers of disruptive financial technology (fintech). This device has been the pivotal tool used in the disruption of the traditional banking paradigm, with the banking app effectively making any smartphone a ubiquitous 24/7 branch. Consumer and business transactional banking can now be done anywhere at any time, rendering physical branches irrelevant outside of administrative and regulatory compliance requirements.

While this form of disruption has been a boon for banks by improving customer satisfaction and reducing expensive people-driven processes, fintech disruption is also hurting traditional models. Take, for instance, mobile peer-to-peer money transfers and point of sale payments, in all their various guises - PayPal, Alipay, M-Pesa, Nomanini, Google Wallet, and Apple Pay are just a few examples.

This type of disruptive technology was a massive step toward disintermediating the banks from the transaction process, and even led to the disruption of the concept of money itself, with digital currencies such as Bitcoin offering a new means to transact and invest.

In developed markets such as those of the US and Europe, this form of fintech has started to erode the traditional revenue streams of banks. Interestingly, though, in developing nations, fintech is helping to give the unbanked masses - the so-called unclaimed market - a means to transact outside of traditional channels, thereby helping to grow the market.

It is understandable then that global investment in fintech ventures tripled to $12.21 billion in 2014 and continued climbing, with US$19 billion invested into the sector in 2015, according to research by KPMG and CB Insights.

And it is not just transactional banking that is receiving all the attention. The insurance and investment markets are now poised to experience a period of disruption that will undoubtedly change the sector's landscape, including the traditional role of the intermediary.

In a process that is being dubbed the 'Uberisation' of fintech, the smartphone and Internet have become the platform on which financial services and products are delivered on demand, at the touch of a button.

In this realm, the virtual world is disintermediating the real one - no more trips to your banker or broker to complete a mountain of paperwork, because your smartphone is now the middleman. It's DIY investing via a Web-based platform, giving investors direct access to anything from stocks and currency trading to peer-to-peer (P2P) lending and equity crowdfunding.

All of these on-demand services are helping end-users bypass intermediaries to access the financial products they want and need to build their own portfolios and manage their wealth. But it's not just the process of accessing traditional financial products that is changing, as the types of investments and financial instruments being offered are rapidly changing too.

Crowdfunding via services such as SeedInvest and Fundable, for example, enables individuals to fund an idea or company for an equity stake. Whether it's a fintech start-up or renewable energy provider, the opportunity to invest across market verticals and in just about any asset class imaginable is now readily available.

With so much disruption happening, particularly in the intermediary channel, should the traditional financial industry be worried? The general consensus is, no. Rather than compete, most banks and financial service providers are acquiring fintech start-ups or are developing their own platforms, services and apps to evolve alongside them.

And, with such an abundance of options, coupled with what is proving to be an increasingly difficult sector to regulate, the need for sound financial advice from intermediaries who are savvy to this new breed for financial offering has never been greater. The 'Uberisation' trend can apply to independent financial service advisors, too, with the potential for a Web-based advice and engagement channel. This will obviously require a shift in the knowledge and understanding of the investment and insurance market, along with the new tech that underpins it, not to mention a new revenue model, but in this age of rapid innovation, it probably won't be long before there's an app for that, too.