WORDS ON WEALTH
By Martin Hesse
Four years ago I penned an article, “The rise of the machines”, in which I presented a widely held view that we were on the cusp of a fintech (financial technology) revolution. “The disruption of the financial services industry, which began as a trickle, is quickly turning into a flood as start-ups introduce innovative products and services designed for a new generation of consumers, and the established providers are forced to reinvent themselves,” I wrote.
I went on to give some examples of ways in which technological innovations were transforming financial services, from “robo-advisers” and investing based on artificial intelligence (AI) to start-up insurers (short-term and long-term) with user-friendly smartphone-based business models that would put established insurers out of business.
The revolution hasn’t panned out quite as envisaged – at least not for those of us who have grown up using traditional financial services. For example, robo-advice doesn’t appear to have caught on in a big way – human advisers are still very much part of the landscape, though they are increasingly using technology to do their drudge work and have adopted Zoom-type consultations in their interactions with clients. And although young tech-driven insurance companies have made inroads into the insurance market, the bulk of insurance business is still being done in traditional ways.
After all, one might argue, most of us still bank in the same way as we did five years ago; our insurance policies are much the same, as are our investments, and many of us still reach out to a human financial adviser to guide us on our financial journey. Okay, you may have added Bitcoin to your portfolio, but apart from that, things are pretty much as they have always been.
You might not have noticed much change, but others have. For initiates to financial services, including millennials and the multitudes of unbanked in less developed regions, the fintech revolution has been far more real, transforming their lives through smartphone-based platforms. For example, digital payment systems are flourishing across Africa and, according to recent news reports, cryptocurrencies have enjoyed a surge of popularity in Afghanistan.
The change in traditional financial circles, it seems, is occurring beneath the surface. The large incumbent players are introducing technological innovations behind the scenes. Blockchain, for example, which lets users take secure control of their own transactions without the need for a regulating middle party, is quietly being put to use in many different ways. And AI is increasingly being used by asset managers to pick stocks and identify market trends.
Independent fintech consultant and founder of Daily Fintech, Efi Pylarinou, speaking at the recent SingularityU SA Summit, emphasised the scaling potential of technologies like blockchain and AI. “We are now seeing a new trend called embedded finance, which wasn't clear three or four years ago.
“Embedded finance has taken two forms in the market. One stream is taking place through existing financial services providers growing their stack of services, such as (investment bank) JP Morgan adding small business lending through fintechs to their offering.
“The other form is non-financial companies now offering financial services. For example, Apple in the US is offering its own credit card; Google India is offering small business lending; and Shopify is offering business banking. This aspect is mainly focused on the distribution of financial services.”
On top of that, Pylarinou says, there is disruption in the way financial products are manufactured, and it is here that blockchain is playing a big role. An example is non-custodial wallets, which are private digital wallets in which to store your cryptocurrency and to which you alone have access through a digital key. “The use of non-custodial wallets has risen exponentially over the past year. For example, one of these, MetaMask, now has an estimated 10 million users,” she says.
“Overall, we have these two distinct layers, which are working in parallel at the distribution level and at the manufacturing level. Of course, these are occurring at different paces in different regions. We are seeing businesses that are offering financial services through platforms or platform-based ecosystems or super apps in China and Southeast Asia.
“These businesses have all adopted very different ways of operating, innovating and using disruptive technologies. The common thread is an increasing degree of openness as a consequence of these players operating differently.
“Financial services are becoming increasingly distributed and there is the sense that an unstoppable decentralisation is emerging. It's only a question of at which level or scale it will be adopted and how it will reshape a landscape that is already much more distributed than it was five years ago,” Pylarinou says.
My reservation is to what extent governments, through regulation, will restrict “decentralised finance” (a trend quickly becoming known as “DeFi”). I believe that where there are established and well regulated financial systems, DeFi won’t be allowed to disrupt those systems to any great extent. But where systems are shaky or non-existent, DeFi is likely to thrive.