While businesses are catching up with the rise of e-commerce and the mobile-first world, physical interfaces altogether are gradually falling into obsolescence. The year 2017 gives strong reasons to believe that working on the enhancement of the experience with any physical interface could be a wasteful attempt to better feed a horse instead of investing in a car (if we were to use Ford’s terms).
The problem is, however, not only in the situation where businesses are still catching up with basic trends, not speaking of exploring the vast opportunities RegTech opens, or all-in-one business banking solutions. The community of business, FinTech, banking consultants/professionals, in addition, tends to heavily rely on false indicators in an attempt to remain relevant and make predictions. FinTech, often, is one of those wrong indicators, and I will further try to expand on why.
FinTech trends do not predict the future, they often only represent an immediate business opportunity that spun out of control and beyond reason
There is a massive community of 7.2K+ FinTech startups around the world, bringing undeniable benefits across segments – democratization of remittances resulted in better inclusion, cross-border payments solutions that shed barriers for businesses, inclusion through economic identity on the blockchain, and a lot more.
On the other hand, every entrepreneur is a businessman/woman, and every startup is a business venture, pursuing an adequate goal to gain traction, and eventually to profit. While assessing the business opportunity, among other things, entrepreneurs exercise their predictive abilities by estimating market size, potential demand, and industry trends in various segments, as well as look at role models that are successfully working in the segment of interest.
What's the deal with 1K+ payments companies around the world?
Let's look at what happened in payments. Stripe, Square Cash, PayPal, M-Pesa, AliPay, and Venmo are among those role models that opened the floodgates for 1K+ payments startups around the world. And why not use the opportunity? After all, in Q3 2016, PayPal processed nearly $26 billion in mobile payments, up 56% from last year, and representing 29% of PayPal's total payments volume for the quarter. Looking forward, the company’s CEO Schulman predicted that PayPal would generate $100 billion in mobile payment volume within next 12 months.
Not surprisingly, payments and lending/funding have steadily been the most represented and well-funded segments. Within the payments segment, mobile wallets/payments represent the largest piece of the pie, according to MEDICI data – about 34% of companies.
Data source: MEDICI
Coupled with a very clear trend across industries that we live in a mobile-first world, the opportunity with mobile payments seems obviously lucrative. Despite the long-worn-off “wow” effect of mobile payments, we see mobile payments startups being launched right and left, without regard to logical questions – do consumers really need another payment app on their phone? Is the experience with every new mobile payment option radically, 10X different than any other payment solution out there? Is this a Blue Ocean situation at all? The answer will most likely (or even definitely) be “NO.”
Speaking of the consumer, in 2015, Gallup’s research indicated that only 13% of adults in the US had digital wallets on their smartphones. Moreover, 76% of those who had a digital wallet have never used it or have almost never used it to make a purchase from a retailer in the past 30 days. Disjoint experiences and disconnected islands of mobile payments solutions now serve as an obstacle to the whole segment to develop.
Moreover, apps overall are having trouble with retention – estimates suggest that <25% of people return to an app the day after initial install, and overall app retention drops to around 11% within a week of install. After 45 days, that number is less than 5%, before hitting 4.1% after 90 days.
I won't even go into long-time-back questioned business models of FinTech startups and the lending segment, in particular. I also won’t be touching slowly-but-steadily-evolving banking apps that almost caught up with mobile payments app in convenience, and now also have a strong footing in the market aside from basic credit/debit account view functionality. Unique markets like India are ahead of the world; the technologies and business models utilized deserve special attention, but that is, as I mentioned, unique.
The undeniable silver lining
Admittedly, we cannot downplay significant achievements that were prompted by the FinTech community. Just to mention a few:
- Redefinition of the role of UX/UI in the financial services industry
- Democratization of financial products (investment apps)
- Expansion of business opportunities in a cost-effective manner through cross-border payments solutions
- Advancements in inclusive strategies in customer profiling (alternative credit scoring, smart data use, etc.)
- Cheaper remittances
- Application of behavioral science for advanced security solutions
- Invisible payments experience leading to a revival of e-commerce
Follow cross-industry leaders to understand where the world is really moving (including the financial services industry)
As pointed earlier, looking solely at the FinTech stage to understand what's happening is like looking into space – the light that is hitting us now will have started from the object quite a long time ago, so in effect we aren't looking at what the object looks like now but what it looked like some time ago. The same way, modern saturation of the payments market indicates the success the pioneers that started out a decade ago had/have. It does not mean, however, that mobile payments represent the hottest opportunity right now.
So, how do we make a better case in understanding the direction of development in the financial services industry, whether it’s about institutional banking or FinTech startups? Well, an option could be to look at the advancements that are happening in the areas bootstrapping financial services – IT, computing power advancements, etc. In other words, how does the underlying technology (hardware and software) change, and who facilitates and owns that change?
Let's look at some examples of ‘unrelated’ changes that happen across industries and can give a hint to who is gaining power, and why:
Gradual obsolescence of physical interfaces in favor of voice and VR
There are a few developments that have been assertively moving interactions between businesses and consumers beyond screens, and physical interfaces overall. More importantly, those developments are not coming from the financial world (whether institutional or the startup community). Let's look at a few examples of non-financial companies that are advancing alternative interactive interfaces:
Apple and its fascinating patent for a voice-first home hub and more. Brian Roemmele, Pay Finders, digs into this curious patent and how Siri will evolve through one of the examples in the patent describing that in this embodiment Siri can answer the front door and mediate interactions with guests.
“This is a far more sophisticated Siri that has high context and uses a shared blackboard system to interact. We can see Apple diving far deeper into the home with ambient Voice-First technology. There are a lot of embodiments that go even deeper into how the new Siri platform will extend in this patent,” Roemmele adds.
- The Alexa Platform
- The Fire Tablet Platform
- The Chime Platform
- The Rekognition Platform
- The SnapTell/Flow Platform
Amazon is also making its voice-control technology available to all, giving developers access to the same tools that power its digital assistant Alexa. The platform is called Amazon Lex, and bundles in both speech recognition, text recognition, and conversational interactions. It was first announced in a “preview phase” in late 2016, but according to a new report from Reuters, it is now rolling out to all developers.
Google Assistant rapidly gains functionality, and gets smarter in understanding and performing a variety of tasks. The assistant will be able to interact with other assistants, manage calendars. Among other things, Roemmele notes 70 different smart home manufacturers that will work with Google Home, an open developer platform to add more.
Moreover, just recently, on May 18th, Google was reported to be adding a shared rooms feature to YouTube VR as part of an update to the app as well as an update to the Daydream platform in general. The feature is not live yet and won’t be added into the app until later in 2017; but once it launches, YouTube users will be able to do things like engage in voice chat and watch 360-degree videos together for a unique way to experience YouTube that is more akin to enjoying content together with friends who may be in the same room. Users will be able to enter into a shared room for a specific 360-degree video and their personas will be represented by the likes of 3-dimensional avatars.
Facebook is now betting its future on augmented reality, the nascent technology that promises to overlay virtual information onto the real world and eventually replace smartphones with something like a pair of glasses or even contact lenses.
Insurance and the financial services industry examples, demonstrating the expansion of interactive dimensions
- Voice Recognition technology is already gaining traction in the insurance industry, Chipin reports. In early January 2017, Fukoku Mutual Life decided to replace 34 employees with IBM’s Watson Explorer AI, which is capable of analyzing and interpreting an unstructured text, audio, and video data to calculate payouts.
- In December 2016, Capital One became the first financial institution to sign up for Cortana and leverage existing investments in voice technology to enable customers to efficiently manage their money through a hands-free, natural language conversation with Cortana.
One company leapfrogged the whole world in delivering unprecedented computing/processing power (and it's neither a financial services company nor a FinTech startup).
The underlying advantage that FinTech startups had over institutional solutions for a long time was the technology component. But just a few days ago, even FinTech superiority has been overshadowed by a company that has a very remote connection to financial services and FinTech – IBM.
The Big Blue announced the prototype of the first commercial quantum computing processor. It’s an industry-first initiative to build commercially available universal quantum computers for business and science. Professionals emphasize that by thinking beyond ones and zeroes, the platform can already solve problems that were considered too complex for classical computer systems to handle – which means it can solve problems that we haven't even thought of yet in fields like pharmaceuticals, artificial intelligence, financial services, and logistics.
While technologies like AI can find patterns buried in vast amounts of existing data, quantum computers will deliver solutions to important problems where patterns cannot be found and the number of possibilities that you need to explore to get to the answer is too enormous ever to be processed by classical computers. With its initiative, IBM invites interested parties to join it in exploring what might be possible with this new and vastly different approach to computing.
IBM Q has successfully built and tested two of its most powerful universal quantum computing processors to date, shadowing Watson: 16 qubits for public use and a 17 qubit prototype commercial processor. In an instant, a large technology corporation took away the technological competitive advantage that startups had in such data-focused segments as RegTech, AI, robo-advisors, trading and investment platforms, and any other segment that feeds its innovation off of the capability to process and drive value from enormous and complex data, structured and unstructured.
"The significant engineering improvements announced today will allow IBM to scale future processors to include 50 or more qubits, and demonstrate computational capabilities beyond today's classical computing systems," says Arvind Krishna, director of IBM Research and Hybrid Cloud. "These powerful upgrades to our quantum systems, delivered via the IBM Cloud, allow us to imagine new applications and new frontiers for discovery that are virtually unattainable using classical computers alone."
A few things we should learn from mentioned examples
- The next big thing in FinTech, and in the financial services industry overall, will not be always powered by ‘discoveries’ within either, but from the environment that comprises the foundation of any solution – the underlying hardware and technology. The next leap will be perpetuated by technology companies that define modern standards and advancements in computing/processing power and accessibility of those capabilities for commercial use. ‘Regular’ data centers will no longer ensure long-term sustainability for solutions that are run in the cloud on their rails.
- Startups in any segment that ground their competitive advantage in anything that has to do with driving value from, or dealing with data and information, should consider an upgrade to the different level of processing capabilities + understand how interactive interfaces evolve to deliver that value through the right channel. Those segments include, but are not limited to, the ones developing AI solutions, RegTech, investments, and trading, robo-advisors (JPMorgan already casts doubt over the future of robo-advisors).
- Traditional interfaces are challenged by external stakeholders (Amazon, Google, Facebook, Apple) in two ways – voice assistants and VR. Connected assistants become smarter and add functionality with the enhancement of NLP and image recognition. Betting on physical interfaces, and mobile, in particular, can no longer ensure long-term relevance as voice-first solutions evolve. With Facebook obsessed on killing the smartphone to own a virtual space, classic interfaces and solutions developed for them will gradually fall out of grace.