Trust in FinTech grows among millennials

Hamid Afantrous, Robin Van Vliet, Joyce Xue

November 2018

Millennials are different. The generation born between the 1980’s and 2000 are complete strangers to their predecessors. They are the first generation exposed with technology at a young age and where technology plays an extensive role. Unlike the generations before, millennials are extreme risk takers, crave for quick solutions, brand-conscious, but most importantly, embrace effortlessly innovations and new ideas.

This unprecedented behaviour of millennials tends to disrupt the traditional financial service industry as we know it today. Millennials are now the largest and most decisive demographic group. Financial institutions cannot longer ignore millennials’ desire for FinTech as a fully-fledged alternative for traditional banking.

FinTech stands for 'Financial Technology' and it is used to describe new technology that intends to improve and automate the traditional finance service industry. Nowadays FinTech companies employ a variety of financial services, such as money deposits and transfers, managing investments, raising money for start-ups and much more. This all, is made possible with a single swipe on the touchscreen of your smartphone. FinTech differentiates itself from the traditional banks as they intend to be more consumer-orientated without the inference of intermediates. This is achieved by making use of the latest technological developments. It is important to note that millennials are well familiar with the latest technologies.

A prime example of the exponential growth of FinTech is AliPay, a Chinese internet company, that now has more outstanding consumer loans than China’s second largest bank. Another clear example is Facebook’s expansion into financial services, as they launched new payment services for Facebook Messenger. The payment service couples the Visa or Mastercard debit card with Facebook Messenger and allows to send money to friends with iOS, Android or on a computer without any fees. Facebook has 1.3 billion monthly active users. Facebook’s intentions to expand reflects a trend among all internet giants including Apple, Google and Amazon.

The blog focuses on how the behaviour of millennials contributes to the success of FinTech and how this success forms a threat for the traditional banks.

How millennials form a threat for the traditional banks

The continuous developments and innovative ways of processing all the data is making the financial world change faster than ever. Applying new technologies and techniques to almost an infinite amount of real-time data gives new insights. The believe, and especially trust, of people in data is growing which lubricates this process over-time. The fast-growing amount of FinTech companies, together with their increasing number of customers are a great reflection of this happening.

Within this market-transformation, FinTech can be seen as a lubrication that is speeding up the process. Nowadays, the vast majority of people are aware of- and agree on the fact that data could add so much more value than it does at the moment, this is partly due to that only 15-20% of the current data is understood at this moment. FinTech is right there to monetize the data. It opens up new possibilities to capture-, and to add value, to the data of this current digitalizing economy.

One of the pros of FinTech is that it enables to analyze and visualize large datasets in a real efficient manner. This gives the business owners insight in millions of observations, instead of just a couple of thousand. The huge potential of FinTech will create more jobs in the future, which will also stimulate the economic growth, especially for small- and medium size companies. Several innovative FinTech solutions can be applied in order to increase the cash flow, improve security and capital management. The main fields where FinTech is very potential are: invoice finance, online supply chain finance, online trade finance, lending, merchant and e-commerce finance.

One of the most well-known examples of FinTech under the majority of people is that it allows people to transfer money from their mobile device in a very efficient and consumer friendly way. By integrating the bank accounts of multiple institutes, the financial data can be synchronized. The big advantage of this process, is that it reduces compliance costs. Digitalizing these financial transactions enhances i.e. transparency and security of transactions. The Blockchain and the rising amount of cryptocurrencies are stimulating the entire economy by creating new and innovative value streams.

Whereas from the lenders perspective, there will be an improvement in matching the different parties (borrowers, lenders, investors), which results in a more level field. This is for instance a very pleasant scenario for the retail investors, since it will be more easy to participate for them. This will also generates more market-liquidity, and thus stimulates economic growth. Another great result of the reduction of information asymmetry within the market is that it mitigates the risk and thus creates a better and more efficient way of risk management.

“If you can’t beat them, join them!”

The traditional banks do recognize the threatening of FinTech-companies. Banks have been working for decades of years to build up a good relation with their clients, which turned the banks into strong brands where people have trust in. Nowadays, the human interaction between a staff member and the client is no longer the most important variable in the process of building a good relation with your clients. By far most of the interactions between clients and the bank itself happen via digital canals. This is exactly the field where FinTech companies form a threat for the traditional banks.

These FinTech companies are way more efficient. Where the traditional banks suffer from outdated legacy-software, unnecessary long and inefficient processes and surplus staff, FinTech companies do obviously not. They are able to implement new ideas and technologies really fast, implementing these same innovative technologies will take much longer at a bank. On this point, FinTech companies are overwhelming the banks. They are even able to offer mortgages, loans and help with investing, which takes away transactions from the banks. Taking away transactions means taking away very valuable data about consumer behavior that can be used to improve the digital experience of the client significantly.

Trust, this is another very important point where traditional banks should make use of their advantage. Whenever a FinTech companies releases a new application or technology under their own name, a lot of people will not trust it since they simply have never heard of the company before. This is where banks should make use of their strong brand name. The banks should supply the FinTech companies with financial capital, in return for innovative technologies. By incorporating FinTech companies, banks can release these technologies under their own name what will result in that clients will put trust in the technology. Incorporating the FinTech companies will result in that banks will keep their insight in the transactions of the client, which, as mentioned earlier, can be used to personalize the service. Besides this, the data can also be used for predictive analyses. Both will result in an improvement of the client's digital experience with the bank.

Under the motto, "If you can't beat them, join them.", the traditional banks should cooperate with the FinTech companies which will have a positive effect on the client in the end.

Regulation vs Innovation

FinTech revolutionize payments, accounting, lending and many other aspects of finance in which both costumers and businesses can benefit from. But how are regulators dealing with the speed of innovation? The purpose of regulation is to ensure an equal level playing field for everyone. Since new fintech startups are growing each day, regulatory bodies are having a hard time keeping up. This mismatch in speed may result in regulations that are too strict and could get in the way of innovation. An example of difficulties that FinTech faces is the US regulatory environment. Due to the lack of a common organized strategy in both state and federal legislation, the regulatory framework is fragmented. There are state and national level regulations that financial institutions must adhere to. For example, the Securities and Exchange Commission (SEC) regulates securities and commodities, the Office of Comptroller of the Currency (OCC) supervises national banks and the National Credit Union Administration regulates credit unions. These are all separated institutions that all have a say in this matter. It’s easy to see why regulators move slow when there are so many legislative bodies and bureaucratic procedures involved. While unclear regulation in the US remain, the FinTech industry keeps on growing. In contrast, the United Kingdom, Hong Kong, Singapore and Australia have superior regulatory infrastructures due to their clear approach in providing a coherent regulatory framework for banks and fintech companies. They understand the need to build up their financial industry through innovation in order to complete globally.

Not long ago, the European Union has made significant changes that gives the FinTech industry a shot in the arm enabling them to strengthen their position against traditional banks. The Payment Services Directive 2 (PSD2) which was passed in 2015, has the purpose to regulate emerging financial services industry and increase competition by allowing non-traditional banks to participate, such as FinTech companies. In short, PSD2 forces banks to share consumer banking information with third parties when authorized by the customer. The PSD2 is an example of a regulatory framework developed by a legislative body that stimulates the growth and competition of the financial industry. The directive allows developers from IT companies – non-banking companies – to develop all kind of services and platforms. PSD2 together with EU’s General Data Protection Regulation, (GDPR) which gives citizens the right to control the use of personal information, will enable businesses have access to accurate sourced consumer data using the voluntarily opt-in method. This also enables a more targeted marketing based on real data, a heavier focus on customer experience. In today's digital age, customers have higher standards and expect their financial services provider to deliver fast, solid and easy products. Traditional banks need to step up their game and evaluate customer needs in terms of customer interactions and digital products.

In today’s digital age, the Gen Y live in a continuously connected world. They are tech-savvy and more brand conscious when they find social validation in certain brands. In a broad sense, FinTech is perfectly suited for Millennials, this can be explained by the fact that most of the creative minds behind FinTech startups could be Millennials themselves.

It is clear that the tech-savvy and forward-thinking Gen Y needs more than what banks are currently offering them. FinTech excels at recognizing the gap and taking the right steps to fulfil the demand. Traditional financial institutions need to identify which customers are at risk from the competition and evaluate their customers’ needs and develop new products to retain them. This is definitely an exciting time for FinTech entrepreneurs.