For the past decade, the financial services sector has made
great strides toward innovation. We have seen technologies move more services
to digital channels. Artificial intelligence and smart algorithms today power
services ranging from robo-advisors that nudge consumers toward better
financial behaviors to analytics that help retirees withdraw their nest egg
more effectively—and everything in between.
While this period—which I call Fintech 2.0—has immensely
benefited people all over the world, helping them connect to the digital
economy and improve their financial health, a lot of the innovation we have
witnessed so far has been incremental. In other words, they have been more on
the “fin” side of the house than on the “tech” side. In practice, this Fintech
2.0 approach mostly repackages a financial service in a way that improves
usability, such as adding a behavioral economics aspect to it, for example—or
functionality, by integrating a service that was previously siloed into a
seamless flow.
Don’t get me wrong; there are exceptions. Many “digitally
native” fintech startups have delivered nicely on their goals and disrupted
traditional players successfully. For example, some clever entrepreneurs found
out that nonfinancial data can be more predictive than past financial data to
risk-assess consumers—powering big FI and changing how credit scoring works
everywhere.
But for most of those who are in the business of incremental
innovation, the hype seems to be ending. Recent consolidations, lower valuations
and scarcer capital mean that several Fintech 2.0 are scaling back, laying off
staff or shutting down altogether.
Big FI Is Still Winning
One of the reasons why Fintech 2.0’s allure is fading is
that big FI is still winning. Despite some disruption here and there, large
firms still enjoy well-established relationships with their customers and deep
regulatory clout. Additionally, because a lot of the innovation happens at the
edge of their businesses, they continue to maintain and profit from core
services. This, in turn, allows them to more frequently than not grow by
partnering, acquiring or building solutions in-house following another
innovator’s blueprint. All of this is relegating more and more Fintech 2.0-type
solutions into the commodity category instead of the compelling innovation one.
More Tech Than “Fin”
The rise of what I like to call Fintech 3.0 will spotlight
those platforms that effectively leverage major technological shifts to expand
the market, enhance use cases—and break off from legacy technologies that have
reached their limits. The shift to software-defined trust (SDT) is a good
example.
Up until now, Fintech 2.0 solutions have relied on hardware
to secure sensitive data and authenticate whoever needs access to it. This has
kept the market shackled to costly, slow-moving infrastructure anchored on
security chips—like the ones you see on your payment card, inside your phone
and on the terminals and dongles merchants use to accept digital payments.
Replacing this antiquated model, which is susceptible to shortages like the one
we are facing today, with a software-based model can motion the market to a
renewed period of innovation and expanded gains—a space ripe for more tech than
“fin.”
The big push to tap-to-pay by the card networks, which
focuses on devaluing and ultimately removing this anchor at the endpoint, and
the entry of Apple into this space—which never does anything casually—is
writing on the wall that we are entering a new era in the financial services
space.
A New And Improved Anchor
While Apple’s payment acceptance efforts seem to be moving
forward despite renewed regulatory scrutiny, one cannot but wonder what
Samsung’s next step will be. I predict that very soon Samsung will find a new
way to join in on the fun—I say “new” because Samsung was one of the early
investors in Mobeewave, the startup that Apple snagged to create its own
tap-to-pay solution. I believe they will probably build their own solution to
compete with Apple for the payments’ acceptance market—and with device prices
way lower than Apple’s, they might as well have an advantage.
What nobody is talking about, however, is that these efforts
are just a new and improved anchor. While Mobeewave’s solution attracted both
heavy hitters, its technology is still grounded on hardware—a chip inside the
device houses the logic needed to process a transaction. In Apple’s case, this
is a solution available only on phones and not even all models.
While a good nudge for the softPOS industry, these types of
solutions are not a leap forward, but a sidestep that transfers endpoint
control from one device maker (the payment terminal manufacturer) to another
(the phone manufacturer). Heck, in the backend, banks still use big boxes
called hardware security modules to hold keys. The real leap will only come
from replacing these last hardware bastions with software.
By no means getting to Fintech 3.0 will be an easy
undertaking. I should know, MagicCube’s software-defined trust environment took
several years to develop and prove. Getting certified by the necessary industry
bodies seemed never-ending because the standards and financial regulations
don’t move at the same pace as technology innovation. Even when entrepreneurs
overcome these hurdles, being a category-creating business means being met with
skepticism on the daily.
Nonetheless, transformational innovations win in the end:
Look at what happened to the EMV chip or NFC. In the words of Victor Hugo, “Nothing
else in the world... not all the armies... is so powerful as an idea whose time
has come.”
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