Digital technology has transformed most industries over the last couple of decades, changing everything from the way we buy food to the way we navigate the streets. One sector that’s remained seemingly immune to this change for a long while is finance – for the most part we still rely on the major banks and other large institutions to manage our financial affairs.
It looks like that’s on the brink of change though, thanks to a new breed of cost-cutting financial technology (‘Fintech’) startups. A report out yesterday from the World Economic Forum found that banks face an ‘Uber moment’ as these new companies look to disrupt them in the same way the taxi market has been.
‘For decades, banks and insurers have employed similar, highly profitable business models, but they realize an Uber moment may finally be coming to their sector,’ said R. Jesse McWaters, lead author of the report. ‘Financial technology companies are deploying online platforms, have small capital bases and make strategic use of data to acquire customers and revenues at a fast pace’
It’s certainly been a long time coming. The major institutions have been cocooned from competition by high start up costs and the demands of compliance, which explains why Metro Bank was, remarkably, the first new British bank granted a licence in 150 years.
‘Bankers used to think regulation would make financial services less appealing for new entrants, but now the penny is dropping that non-bank rivals can just attack more profitable areas and skim the cream’, said Morgan Stanley’s Huw van Steenis,, who contributed to the report.
Banks might not be facing an existential threat – after all they still control most of the cash that’s knocking around. But they will need to make themselves more nimble and open to change if they want to maintain a firm grip on their market.
Five of the hottest companies in FinTech
Probably the most celebrated new business in UK tech, Transferwise allows people to send money abroad more cheaply by cutting out the middle man. Its photogenic founders and their penchant for publicity stunts (like a semi-naked flashmob at Liverpool Street station) have done a decent job of turning a very functional service into a cool brand.
Zopa connects savers looking for a better return directly with those looking to take out a loan. Cutting out the fat that hampers banks allows it to offer better rates. Zopa recently signed a deal with Metro Bank that will see the challenger bank put a chunk of cash through the platform.
There’s dozens of online self-investment tools out there, but Nutmeg is different in that it offers a fully managed service for a lower price. Set your risk preference and savings goals and its team of investors will decide where the most appropriate place is to put your cash.
Though it’s not yet open for business, Britain’s first entirely digital full-service bank was finally awarded its banking licence last week. Launched by Metro Bank co-founder Antony Thomson, it’s backed by veteran investors Jon Moulton and Neil Woodford.
New ways to pay are springing up al the time – from social media transactions to apps that help you split a restaurant bill. GoCardless, which has raised more than $10m from investors, helps businesses set up low-cost direct debits by grouping individual payments together. Founded in 2011, it processes more than £500m of payments per year.