Again there is speculation in the US over whether companies like Amazon, Facebook, Apple or Wal-Mart could acquire a banking license. The tradition in the US and many other countries has been that lawmakers and regulators have wanted to keep banks separated from other businesses, like retail, as it could for example create conflicts of interest in terms of making lending decisions in purchasing the company’s own products. Whatever happens about this regulation, thanks to FinTech, we’ll see more finance services integrated with other services.
If you go to buy items online, you might need finance for your purchase. The easiest solution nowadays is probably to use a credit card to make the payment. Then, depending on your card, you have more time and flexibility to make the payment. The problem is the actual annual interest rate of the card is easily 30% to 40%. You could get a loan with much lower interest rates, but it is complex to get a loan quickly when you are buying something.
Some services offer you ‘financing models’. For example, you can buy a mobile phone by taking a two-year contract with a carrier. Those packages then typically include some call time, text messages and data. As a whole those pricing packages are often complex and it is difficult to calculate how much you actually pay for the phone and what is your interest rate is on the deal.
FinTech solutions distribute the whole finance industry in many ways. There are more niche services for lending, investing, savings and many other needs. We are moving from a model where a few finance institutions were big black boxes offering all services to a network of countless smaller services with open APIs.
An important part of the new services is better usability. You don’t need to go to a bank branch to apply for a loan and take your ID card, utility bills and bank statements with you. You can create an online application in a few minutes and systems based on data analytics make the lending decision and pricing in real time. Now it is also easy to build these kinds of services technically. There are finance back office services, development components and open APIs available, and it is possible to implement a service in a couple of weeks.
This also means that these kinds of finance services can be easily integrated to the check-out process of an e-commerce service. An e-commerce service can also integrate many lending services to their service offering, and a lending service can be integrated to many e-commerce services. It opens the market for open competition.
In practice, this means a consumer could have a list of finance solutions on an e-commerce service, when she or he purchases something. She could compare which one is best for her needs, receive financing on the spot and make the purchase. This doesn’t mean that the e-commerce service offers the finance services or is a finance company. They just make those services available on their web store as part of the ecosystem.
Traditionally available finance has been an important part of competition, for example, in the car market. Many car companies have their own internal or external finance partners. When you have bought a car, it has always included some paperwork and the finance part has been an additional layer extra. But for smaller purchases that kind of paperwork would be too complex.
Now we see a situation FinTech that integrated finance solutions are easily available for all kinds of retail services and they offer also a smooth customer experience. This is part of a much bigger development in the finance industry. Finance services are no longer their own isolated islands, but they can be components in any service.
The FinTech discussion has still often been linked to some highlights like p2p lending, bitcoin or mobile banking. The reality is that the impact is much larger for the whole industry and how it works. It will also change how and where finance services are offered to people. For example, you need credit or a loan, but when you buy something, you just want to buy it, not to go to a bank or a lending service. When the services are truly built based on customer needs, it changes their availability and customer experience fundamentally.