Artem Kovbel about present and future of the global financial system
New technologies have dramatically changed the financial sector and the payment system as a whole, making it easier, faster, and more convenient. In turn, it seriously affects the development of the entire global economy.
Financial technologies = quality of life
I think the World Bank research is the most eloquent answer to these questions. Over the past few years, it has prepared a series of reports on financial inclusion mechanisms. The term refers to the conditions under which both individuals and businesses are provided with equally easy and fast access to financial technologies (Internet banking, electronic payments, etc.). World Bank experts note that due to this, it is possible to effectively combat poverty and economic growth.
In particular, the Financial Inclusion report. Europe and Central Asia Economic Update emphasizes the obvious interconnection between the level of penetration of financial technologies and the quality of life of the population. The higher the first, the higher the second. The experiments confirm that. In 2016, for example, Kenya found that after local households were able to store and send funds via mobile apps, their savings increased by 20%, and their overall poverty rate fell by 22%.
Why is this happening? Due to the fact that financial technologies give people new opportunities for saving and managing their money. In Ukraine, Pryvat 24 is a striking case in point. Many people are well aware of the fact that this application contains moneybox tool (“Skarbnychka”). It allows users to automatically deposit a part of their money into a digital account without any effort. The accumulation function is also well managed by all kinds of deposits, which can be easily opened via the application. Indeed, on the one hand, you will not save much using these tools. On the other hand, you will not spend all your money at once, as it often happens with cash. In this way, financial technologies teaches us to save some money and manage it more consciously.
They also significantly accelerate and simplify payments, which facilitates the solution of everyday tasks and increases the mobility of people. For example, some time ago, before you travel somewhere, you had to come personally to the railway station first and then buy a ticket there, but now all the issues can be solved via the Internet in 5 minutes. Now it is easier to go somewhere just for the weekend. That is why people travel more, spend more on journeys, and finance the corresponding companies. The latter, in turn, earn more and pay more taxes to the state budget. This scheme works not only in tourism but also in all places where it is possible to buy something without cash (food, clothes, education, etc.). Consequently, the economy is growing.
For these reasons, the World Bank considers financial inclusion to be one of the main drivers of economic development in the future. In fact, it initiated a project known as Universal Financial Access a few years ago. The UFA goal is to ensure that by 2020, all people have free access to the basic financial technologies, such as bankcards. According to World Bank statistics, about 1.7 billion adults worldwide (or 31% of the total population) do not have a basic transaction account and do not use other financial opportunities.
It points to the fact that cashless payments will be increasingly widespread around the world, and the use of cash will be reduced. However, that does not mean that it will be replaced by Bitcoin or anything else.
Fintechs and banks
The so-called fintech startups have become the ambassadors of changes in the financial world. Ukrainian users certainly know such services as Liqpay, Easypay or IBox, but in general, there are more than 80 financial companies. Most of them, however, offer a narrow range of services, usually in the field of payments and money transfers, or online lending. Whereas in Western countries, fintechs are developing complex B2B solutions using digital technologies. There are already algorithms for combating money laundering, services of development of the business plan for obtaining loans, tools for valuation of investment projects, and much more.
The fintechs showed such impressive results that a couple of years ago, it was discussed, that in the future they would supersede banks and replace them. The boom occurred in 2014-2015 when the amount of investment in the industry tripled compared to previous years. Now the hysteria has gone. It became clear that the fintechs were not able to compete fully with the banks that had understood the trend and successfully developed their financial solutions.
There are several reasons why fintechs failed. These are both greater customer confidence in the banks (will you most likely take your money to a startup or an organization with a long history?) and legal risks.
For example, a startup making transfers from card to card of the users has to pay Visa and MasterCard charges for each transaction, as well as to the acquiring bank. However, the banks themselves should not pay in such a situation because they are the principal members of Visa and MasterCard. It is almost impossible to compete in such conditions.
However, this situation does not mean that the fintechs will disappear.
Nowadays, there is an interesting phenomenon – a symbiosis of banks and fintechs. The first either buy/absorb the second, or work on a partnership basis. Perhaps there is a future behind this cooperation. Banks have experience, connections and clients. Fintechs have technologies. If we combine their strengths, they will work with the greatest efficiency.
Blockchain is out of range
The fate of blockchain technology is similar to the fintechs’ fate. In 2015, blockchain technology was promised a great future in the financial segment and some even assured that we would pay by Bitcoin via blockchain while other services would be extinct.
Nevertheless, the situation has been the opposite in recent months. There are no ready-made developments on blockchain. Most of them are either niche or still in the development stage. This resulted in an outflow of investments from the segment. The graph below shows that there has been a sharp decline and the highest peak in the last year.
In 2019, blockchain is likely to develop in several directions. First, in niche applications where the technology has already demonstrated itself. Secondly, in innovative developments with a long-term perspective of implementation. That is, in projects that initially do not promise fast capitalization.
You have to admit this is far from the revolutionary changes that we were told about a year or two ago. Of course, the situation may change at any time. Maybe tomorrow a startup will appear, that will put the whole world on blockchain in a year. Nevertheless, we cannot talk about it yet.
The financial system is changing and will continue to change in the future. New developments in this segment will contribute to the emergence of new financial services, changing our lives and the global economy as a whole. At the same time, all these changes represent not so much the creation of a new and the abandonment of the old as the modernization of the old. Intensive, deep, but still modernization. Therefore, one should not expect anything as surprising as the disappearance of banks and the mass transition to blockchain in the short to medium term, for sure.