Fintech – New Label for a Mature Profession
Financial Technology or Fintech many would argue goes back to the launch of the Diners Club card in 1950. However, card transaction processing was still very manual at that time and the author suggests the beginning of Fintech started with the loading of bank account details, that was held at branches on ledger cards to a centralised digital database. The timing varied by country but as a generalisation, it was in most cases the 1960s.
The next momentous task initiated by banks was shifting their focus from account holders to customers. As a customer might hold multiple accounts at the same bank, often at different branches, the identification and rationalisation exercise of sorting and matching account details was necessary to create a comprehensive and accurate view of a single customer.
Therefore, the back office was the focus of the early years, involving the building of systems that processed masses of data, generally in batches. These systems are frequently now referred to as legacy systems. The legacy systems specifically in banking laid the foundation to enable the development of the interactive world, experienced today. Some may claim the industry had the ideas, but the technology was slow to deliver capability. There is no argument it is now delivering.
The timeframe for a more interactive world again varies by country or region but as a generalisation, the early 1980s was the beginning of electronic banking services with the intensive rollout of upgraded teller platforms and the ATM.
ATMs should be rated as the most significant development as they were the first mass self-service electronic delivery channel. The original ATMs were introduced in the late 1960s and early 1970s. The early machines accepted a fixed value card which they did not return. The account holder needed to visit the branch to retrieve their cards. ATM networks in subsequent years were established by banks to essentially push customers requiring cash out of branches, as they thought this would be more cost-effective. The first banks to develop their networks believed they would gain a strategic advantage over their competitors. The business case did not anticipate customers would visit an ATM more frequently than a branch simply because it was more convenient. Further, not too many banks realised any long-term competitive advantage as ATMs when introduced into a market quickly became a must-have service and all banks in various ways responded.
Following ATMs came Point of Sales devices in various forms. Initially many were draft capture devices that still required a cardholder signature. Full function POS services were card and PIN-based. The card PIN normally being the same as that used for ATM transactions. For various reasons, EFTPOS did not gain the same acceptance as quickly as ATMs.
The credit card business and processing models progressively adopted the technology. This process has not stopped. As an example: OCR was introduced to read credit card vouchers before being replaced by EDC to improve efficiency by eliminating the paper. Later EDC was upgraded to EFTPOS for security reasons, inclusive of EMV compliant microcircuit cards leading to NFC and now mobile phones play a role.
Microcircuits or smart cards throw technologists into a frenzy. The chip had the potential to support various applications and perform multiple tasks centered around payments. The most interesting development was a digital currency based on a platform labelled as Mondex. Many banks made commitments to promote Mondex as did MasterCard who invested in the scheme. Mondex was like many technology initiatives by failing to be a commercial success, but it did lead to EMVCO and the development of smart card standards.
Financial Institutions in the current era, regardless of the classification of their market, are managing an increasingly complex technology-based infrastructure, supporting a broad range of payment services. Payment systems generally do not die but simply fade away to varying degrees. Cheques are still being used in significant numbers in many countries. Credit card vouchers are on rare occasions still used. Even telephone banking (IVR) in the age of mobile is surviving.
The financial institutions need to answer the following questions:
- How do they maximise their return on existing investment when there is a continuing demand, (more often from the technologist) to introduce replacement services?
- The original investment in electronic payments was justified on the back of efficiency gains. If this is no longer necessarily valid, how do financial institutions justify their investment in new technologies?
- How do financial institutions react to non-industry players trying to secure a piece of the market or is this welcomed, allowing financial institutions to concentrate on generating profits?
- How do banks respond to pressure from governments and regulators to service an un-profitable market segment (Financial inclusion)?
What we are seeing across many markets is that financial institutions are demonstrating in varying degrees a willingness to withdraw from payment services by supporting third-party payment service providers, (PSPs) in various disguises.
Many will claim this is evidence financial institutions are losing out to PSPs. Financial institutions alternatively could be strategically withdrawing, recognising others can undertake the processing more efficiently in a competitive space. Banks’ primary concern is to retain the customer relationship. They recognise others can undertake the heavy lifting, (processing a high volume of transactions) while they concentrate on the more strategic aspects of their core business where they can maximise their profit.
1. Influence of Technologists
The 1990s did see many technology-based initiatives emerge such as biometrics and blockchain. They failed probably for two reasons. Firstly, the market had not reached a point recognising a need, or many ‘killer applications’ had an ill-defined end user proposition. The change was coming fast, and bank customers were overwhelmed. Further, the introduction of new technology-based processes comes at a cost. As one banker at the time explained to the author, the bank needs to see a return on its investment relating to the most recent technology-based initiative before considering the introduction of a new initiative.
The evolution of payments may be seen by many as technology-driven but the pace or adoption has always been driven by the users, (payers, consumers, merchants, payees) as well as by the financial institutions and service providers who have an appreciation of their account holders’/customers’ propensity to accept progressive change.
Why the Excitement?
Payments as mentioned are driven by the user’s willingness to adopt. Technologists will continue to develop innovative solutions to meet their perception of the users’ needs. As technologists, they could repeatedly get it wrong. So, it is important to understand what drives changes in user behaviour.
Consumer key concerns are defined by: Trust, Friction and Cost!
Consumer practices have evolved over the last 2-3 decades, resulting in the emergence and growth in acceptance of e-commerce and internet banking services. Banks have pushed their customer facing services out of branches into the homes, offices and the pockets of their customers and generally their customers have responded, whereas ATMs only pushed a limited range of services onto the street.
It could be argued in the last decade technology has reached a level of capability where it is feasible to deliver and commercialise previous dreams. Biometrics supported off a card or a mobile platform can now be utilised across multiple applications. NRT payments are now feasible and supported by either a mobile or PC-based interface.
The giant technology gains still do not guarantee commercial success. Businesses and their customers especially in the payment space will determine what is successful and what will fail. The technologists need to accept this fact and work with businesses and financial institutions closely in a cooperative manner.
2. Consumers/Businesses Will Decide
The payment specialist and technologists have this naïve view that will drive the future direction of payments. All technologists can do is put forward alternatives and users will select.
Technologists need to rate their proposed payment services against the three factors of friction, trust and cost. They need to understand the proposition for each participant category in the payment chain, especially the users, (payee and payer).
3. Are the Fintech Participants at Fault
The development of Internet services, utilisation of mobile as a payment delivery channel and the participation of an expanded array of actors has made payments a far more interesting industry for those of us involved. The drivers for the new non-bank entrants are not clear the market is open to new entrants who deliver more efficiencies to business services.
In the Fintech sector it could be said, ‘So many have never (or will) spent so much on failure’.
Many point the finger at such failure at the traditional market participants, specifically the financial institutions, and the card schemes. The reasons are more fundamental.
- Maturity of the technology
- Cost not of the technology but of deployment
- Disruptive not only to the service provider but importantly to the user with minimal perceived benefit
- Timing is always critical, especially if an alternative (even if inferior) solution has recently been deployed
- Non-compliant with industry standards
All and each of the above factors will deliver a poor business experience.
4. The Immediate Future of Fintech
Speaking with Camilla Bullock, CEO of Emerging Payments Association Asia, three areas of interest were discussed:
- Cross Border
- Business Payments.
For cross border, Camilla Bullock compared current payments processes to where telecommunications was 3 decades ago when making an international call was expensive and often the service quality was poor. Cross-border payments need to become frictionless and immediate, 24 X 7. In the last couple of decades, effort has gone into remittances but businesses cross border payments must be seriously addressed. Time to drop the USD as the international business currency and move to an international stablecoin with its value potentially pecked to a basket of international fiat currencies.
Cross border payments are also subject to a range of international regulations that need to be rationalised based on criteria that are politically driven. This must be addressable through the use of artificial intelligence being deployed at the point of initiation.
There has been a focus on data about the needs of marketers, rather than from a service delivery perspective. The subject of planning a holiday was used as an example. Each time we travel our views on the means, accommodation, and activities are possibly very similar, even if the destination is different. The concept of pressing a button and your itinerary is displayed and after making a few small adjustments pressing another button and it is all booked. That is a service based on your data not on collective data of a market segment would be motivation to allow the travel industry to collect relevant data on our travel, business or holiday.
Business payments are possibly given little attention from the Fintech sector as technologists tend to focus on areas where they have personal experience. However efficient business payments are critical to the development of an economy. We are seeing activity with respect to e-Invoicing driven by governments to reduce payment timeframes.
This subject was also covered in discussion with Bullock where businesses would prefer to see payments integrated and become seamless in the overall process of doing business.
This is potentially within the scope of CBDC with the adoption of smart contracts. A business event triggers a payment with or without the payer’s business confirmation. The efficiency gains would be significant. No doubting somewhere it is being addressed.
Author: Peter Goldfinch, Research Director, Payments Consulting Network
Peter Goldfinch have moderated the panel entitled “CBDC Panel: With China and India already launching CBDCs in the region, how are the use cases evolving around this and what can merchants, consumers and banks expect out of it?” at the 2nd Annual FinTech & PayTech Connect Asia last 11-13 October 2022 held at Raffles City Convention Centre, Singapore. Camilla Bullock was also one of the speakers for “All Star Panel: Making sense of real time payment infrastructure and nuances across geos – How can you effectively streamline, automate, and leverage your data and partner with the fintechs to improve payment efficiency and better connectivity?” and “All Star Panel: With BNPL expected to hit $92 billion in transactions by 2025, what are the factors driving its growth and the future possibilities?”
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