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After decades of complacency—coddled by regulation and consumer inertia—the entire financial industry is about to change. In 2016, we'll see a perfect storm of regulatory, technical, and cultural transformation that will make tomorrow's financial systems nearly unrecognizable. Below I lay out some of the developments and themes that will shape the fintech world in the months to come.
Trust and information
Banks and insurers rely on two fundamental building blocks: trust and information. We trust a bank to pay us back what we put in our bank accounts; a bank trusts us to repay our credit cards. Banks use information to assess risk in a loan; insurers do the same for a life. And financial institutions maintain ledgers for transactions, setting up networks of lenders and borrowers, payers, and merchants.
We now have a number of new ways to determine trustworthiness.
- Big data is better than any actuarial model because it can learn and adapt. We can predict with far greater accuracy how long someone will live and how they'll die. We can even give them devices to record their lives and then use that data to measure their mortality.
- That same data can tell us if they'll pay their bills. Movement to and from work, across cell towers, is a good predictor of employment; social media can be as effective in assessing trustworthiness as a credit score.
- Cryptocurrency means money can be trusted without a central authority or seal of approval, making a trusted central bank less important.
Information is easier to deal with, and we can harness new sources cheaply.
- A network of customers can make their own bank. Peer lending leads to emergent credit unions because the cost of establishing the network is tiny.
- The wisdom of connected crowds outperforms financial analysts when predicting the future.
- While humans are horrible at keeping track of information—"your mind is for having ideas, not holding ideas," as Getting Things Done's David Allen has observed—software has no choice but to do so.
Trust and information processing, once daunting barriers to entry into financial services, are now in the hands of many. Big data makes real-time processing possible; cloud computing makes it possible for everyone. One speaker at the O'Reilly Strata + Hadoop World Conference in Singapore talked about cutting the credit approval time for small loans from two weeks to six seconds. That isn't just faster—it creates entirely new business models.
Once, credit card makers had to ship cards to their customers and then handle signatures, chips, PINs, and fraud. Today, most consumers have a digital credit card with powerful biometrics and multifactor authentication: their smartphone. That same smartphone (or tablet) can double as a point-of-sale system with Stripe and Square, dramatically reducing the Byzantine network of payment gateways and middlemen.
The wrong radar screen
Nowhere is this emergence of cheap platforms more obvious than in Asia. There, chat giant Tencent includes a dozen payment models in its chat app, something that looks completely foreign to Westerners. A customer might pay a merchant in cash, and have the merchant make change in WeChat. More likely, the entire transaction happens through smartphones.
This kind of embedded payment is incredibly disruptive. Consider, for example, the hung bao (red packet). This is a traditional Chinese New Year gift of a small amount of money in a red envelope. Tencent (and its competitors) makes it possible to send hung bao to friends in chat.
Even this has evolved. If you send a hung bao in a group chat, the first person in that chat to click it gets the reward. This keeps users glued to their phones, but also provides a socially accepted form of advertisement; if a member of the chat room posts something spammy, they can apologize by including a hung bao.
But Tencent went further. A hung bao can be programmed for sharing—¥200 might be shared across 10 people, with an amount calculated randomly by the app. This kind of gamification of micropayments isn't just popular, it's a huge grab for user credentials; after launching the hung bao feature, more than a hundred million Chinese had put their bank details into the app, and the small transfers started filling wallets, creating hundreds of millions of online balances unlinked to any traditional bank.
This happened in a week.
The platform is free.
It supports a dozen other payment models.
If you're a bank, this is an existential threat that has become the default payment model for the most populous nation on Earth in just a few years. But you probably don't think your biggest competitor is a chat program.
The ubipay era
With these changes in payment models, the bank is becoming invisible. We've moved to e-commerce for much of our shopping, and we rely on shipping to deliver everything from food to beds. I give Uber my credit card once, but I use Uber to pay a bill every day. The payment has receded into the background.
The term "ubicomp" refers to a time when the processor blends into the world, making itself indistinguishable. I think that for finance, we're at a similar moment—call it Ubiquitous Payment, or ubipay, where the payment becomes so pervasive and so cheap we scarcely notice it.
Ubipay is triggering a shift in regulations, as consumer expectations change, too. We no longer want a monthly bank statement, churned out by the mainframe in the basement; rather, we want a real-time balance and a searchable history. And we expect it within the app, the chatroom, or from the merchant, blending loyalty, logistics, endurance, support, and the transaction itself.
Banks might be too big to fail. But the fundamentals on which they're built—having access to better information and being unassailable bastions of trust—have been eaten away by technology and culture. 2016 will show how they plan to reinvent themselves.