The Pace of Change in Financial Services

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Kylie Greeff
25th October 2017

Last week, rebuildingsociety’s founder and CEO, Daniel Rajkumar, and Legal and Compliance Manager, Kylie Greeff, attended the 6th ECN Crowdfunding Convention in Vilnius, Lithuania.

The conference centred on the rise of new technologies for accessing finance, and featured presentations and panels from members of the international financial community.

Daniel was invited to take part in a panel on the topic: How are the banks and traditional financial actors reacting to a new paradigm of online access to finance? On the panel alongside Daniel were Jekaterina Govina, Counsellor to the Board of the Bank of Lithuania; Lasse Maekela, CEO of Invesdor; Mantas Zalatorius, Chairman of the Lithuanian Banks Association; and Yoann Nesme of PPL, a Portuguese rewards-based crowdfunding platform.

The panel, split between those associated with “old finance,” or traditional financial institutions, and those associated with “new finance,” enjoyed a very animated and direct discussion which was very well received by the audience.

It is evident within the finance sector that there is an increasing merge of old finance and new; many peer-to-peer platforms rely significantly on the engagement of old finance, for example, through the investment of institutional investors. Likewise, some old finance institutions are starting to consider new and innovative ways to improve their products and services for their existing clientele. As such, the main lines of discussion and debate at the event focused on whether traditional financial institutions are truly committed to, and open-minded about, working with and developing relationships with FinTech companies.

Daniel explained that banks in the UK have been obliged to collaborate with P2P platforms through the Business Referral Scheme. He commented that this program is widely considered to be ineffective, not only in terms of helping businesses find the right type of finance when rejected by the banks; but also in that the platforms by and large do not get access to the cream of the crop. The sentiment exists that the banks want to be seen to be new and customer friendly, but have not actually moved very far beyond a degree of marketing and PR spin.

Jekaterina said that she felt that the banks are moving towards closer collaboration with FinTechs, but that it almost seems like they are going through a cycle similar to the five stages of grief. “A few years ago, the banks were definitely in a state of denial about the potential of FinTech companies – particularly crowdfunding companies,” she explained. This was followed by a short period of anger and retort against such newcomers, and they are now, slowly, moving towards a state of acceptance.

Mantas, who has been brought in to his current position to accelerate the banks through the five-stage cycle, agrees that change within the banking industry across Europe is needed. He stated that recently, FinTech has been the only thing in financial services to drive the change; that the increasing integration and use of sophisticated software within traditional finance products has made the industry “flatter and more even”. He said that the industry desperately needs the “cooperation of the old guys and the creativity of the new guys,” and believes that the banks are making significant steps towards adopting the change.

Daniel disagreed with Mantas; he believes that the banks don’t really want to change, and that they aren’t “willing to self-sacrifice, like Amazon did with book sales for the Kindle.” He predicted that “we’ll see internet and tech companies becoming the new banks, just like we saw tech companies become the new music and film producers,” going on to highlight that if the banks need an example of what their future might look like, they only need to look to China and Alibaba’s Alipay and Yu’E Bao. “The future might be nearer than expected for the banks, with the release of the Payment Services Directive (PSD2) Regulations in early 2018,” Dan observed.

ECN 2017 2

Mantas agreed, saying: “PSD2 is something that the banks will have to get used to, and get used to quickly – which will be hard due to the slow nature of the banks.” However, he did go on to add a word of warning, explaining that while there is no doubt that PSD2 will bring a very high level of change and innovation, such a significant level of change in an industry that is slow to react, such as the finance industry, could risk breaking the current system completely, which would be a disaster not only for the banks but also many of the FinTech companies trying to make it in such a new sector.

“PSD2 will take away the advantage that the banks have had over FinTechs for so long,” commented Dan. “The live data will help more crowdfunding companies apply more intricate risk analysis models and implement better risk monitoring, and also allow these platforms and the consumers lending through them to better price the risk.”

It is clear to anyone familiar with the financial services market that there is a huge amount of change taking place, and that a large factor driving this change is an increased awareness and understanding of financial products – and their rights – on behalf of the consumer. More and more consumers do not want to have to visit a bank branch, instead expecting to be able to manage their finances from their smartphone while on the go.

Given the amount of data that consumers are willing to give away about themselves, knowingly or unknowingly, it is certain that data will drive innovation and change in the FinTech and crowdfunding sector for the foreseeable future. As such, the firms that survive will be those that are willing to change and adapt. For the first time in decades, it seems that the crowd and consumers are driving the changes of the financial institutions, but one must ask – in which direction? The thought of a company like Facebook entering the financial sector is no longer unrealistic. It may not be something that we would readily encourage or relish; but that doesn’t mean it won’t happen…

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