Financial services are no longer the enigma they once were. Gaining ever-increasing accessibility, these services are on the brink of exploding. While obtaining greater access to financial services comes in part because our world is becoming more digital, it is also a result of new, innovative and disruptive influences chipping into what has long been a cozy oligopoly among established financial institutions.
Now, the stage is set for an Internet-style disruption of financial services that will radically change the landscape of how the public buys and consumes financial products over the next few years. These changes will only serve to move business forward, leading to increased innovation. This gives us all better products and services — at a fraction of the cost.
Largely due to the financial crisis of 2008, regulators who were previously a major barrier to new entrants are now less likely to trust banks — especially when it comes to the need to protect consumers from new smaller players. Changes in regulations, such as the JOBS Act in the U.S. and the restructuring of the FSA in the U.K., also make it significantly easier to start and grow new businesses — which means they can often innovate faster than large, slow-moving corporations.
These developments, combined with the widely held disenchantment the public feels toward large financial institutions, make consumers far more likely to experiment with new service providers. Interestingly, the entrepreneurs and developers who are leading this charge are former employees of these large financial institutions, armed with the knowledge they gained of how these products work and how easily they can be replicated and simplified in a digital world.
Early efforts to digitize finance have focused on mobile payments such as Square or Braintree. However, interest is now moving into a second wave of disruption, honing in on areas such as money transfer (Dwolla, TransferWise), foreign exchange (CurrencyCloud), savings accounts (Simple) — even car insurance (MetroMile) is getting some attention.
This groundswell of change is already reaching into core areas of banking, including fundraising (AngelList), peer-to-peer lending (Prosper, Lending Club), crowdfunding (Kickstarter, Indiegogo, Fundly), and everything from funds management (Personal Capital) to automated and impartial investment advice services (Wealthfront, Betterment) are now being targeted as areas of interest by innovative parties.
Digital currency in particular has been gaining a tiny bit of traction. Take bitcoin, which has been around for years but recently saw a surge in popularity. Regardless of whether or not bitcoin will always be the big cryptocurrency on campus, with more than 80 services available, it’s clear digital currency is here to stay.
Still, it’s not all rainbows for these new ventures. We can all recall the debacle that was the demise of Mt.Gox, which hemorrhaged $460 million in bitcoin due to malicious hacks, revealing that bitcoin’s first test attempt to survive a scandal was a bit of a failure. Not all is lost, though. Such events merely illustrate the need (that plenty of players have jumped on already) to push further development in this area.
With digital currency as a major unifying element for the industry, its disruption is enabling a third wave of change wherein the financial institution is removed from the equation. While many banks recognize that digital services are crucial to their future, they have largely been slow to establish this presence, especially on mobile.
Beyond this, however, banks traditionally operate as a trusted intermediary between savers and lenders, and it is this role that represents and defines the key role they provide for consumers. If digital currencies are able to eliminate this role (as they say they can do), everything changes.
Successful digital currencies will be those that enable the transfer of money between parties anywhere in the world, without the need for intermediaries like banks or payment processors (and their associated fees). These services are also conveniently based on the new technology of blockchain, a public ledger of all transactions in the network. This capability is the new key to a wide range of possible new businesses.
Business leaders in particular need to embrace this disruption no matter how fragmented it may appear at the outset. Banking institutions have made billions in profits over the past by maintaining control over relatively simple financial services that today can easily be replicated by new entrants at a fraction of the cost. Increasing the accessibility of these services will yield a more effective financial system for everyone, not just free of needless fees and bureaucracy, but more importantly, chock-full of capabilities we never even knew we needed.
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