This year we saw a lot of publicity surrounding Bitcoin, cryptocurrencies, and decentralized management of data registries. A major factor was the importance of elements of anonymity and independence of payees as well as the relations between the market participants, with an accent on the removal of intermediaries. Major banks have been researching Automatization of processes while keeping personal data protected are becoming more talked about. Some of these trends got early traction in 2016 while others will become know more widely in 2017 through the increased use of FinTech software outsourcing companies. All of them are sure to be a major talking point next year.
Flexibility of online banking vs. highly-regulated offline banking
We should note a trend that’s been developing quietly for some time. That is online banking. The major point here lies on the surface, and it is quite interesting regarding technical implementation as online banks employ in their services development outsourcing to minimize costs and increase speed of all FinTech technology processes. The main stalling point of the banking system are the classic banks with sharp offices and strict regulations, which require compliance every step of the way, adhering to standards and so on. But in the end, people and services have been actively engaged to improve online presence by going away from offices and planning for online financial processes.
At the same time, if we take Europe as an example, there are a lot of various banks there in every country. But people in Europe are quite mobile and work in different countries. They can have accounts with a number of banks in different countries, and that actually makes the financial management process quite complicated. And even if the banks claim to have offices in different countries, the account management can usually be done only in the country where the account was opened.
And in this instance, the flexibility of online banks and their use of outsourcing in FinTech development comes to light. The advantages for online bank users are obvious. When you open a bank account online, you can use it wherever you like. No limits or strings attached. The main thing here is the absence of territorial fixation. You can open accounts in one location, and your online bank is sure to have partnered up with local banks to offer you simplified inter-bank transfers.
Blockchain: privacy protection as a stalling point for development
Many large banks have initiated working groups to start using blockchain technology to offer their customers safer and cheaper transactions. They employ FinTech outsourcing companies to boost the speed and quality of processes. The overall idea is good, but blockchain has been envisaged for the environment where parties do not trust each other. This technology offers public access to information so that it can be:
- a) verifiable and cannot be changed (this is key)
- b) open for anyone to review.
As for the banks, this openness is not easy to manage because it violates one of the most important foundations of the banking system – Privacy Protection. Plus, there is a factor of human error or malicious intent. The level of fraud, in any case, can be managed. There are rules to punish for it. As for the factor of human error, the end result does not differ much from malice. And this hurts one of the main advantages of blockchain and Bitcoin as a stable system. With the openness of access, there is a direct contradiction with the concept of banking secret. Of course, banks transfer some info about payees to the government or to process transactions, but with blockchain, this information becomes available to the general public. In 2017 we expect to see a solution as the trend for the use of blockchain will gain even more ground.
From the FinTech development point of view, such advancements will offer new solutions that will reduce not only the commissions paid, but will also reduce the time of transactions. That is particularly important for cross-currency and international payments. Blockchain will be used as an infrastructure-combining tool, but we have to account for existing systems, like SWIFT, which is well-spread and used in international transactions by many banks.
B2B and micropayments (cryptocurrencies, Bitcoin)
With B2B and micropayments, we have a trend overlap. Let’s take a very common scenario of an international money transfer, the so-called “guest workers” phenomenon where people regularly send small remittances to their relatives in another country. For every transfer, there is a hefty commission. As a result, the total cost that is paid in commissions for a $200-300 transfer becomes quite tangible. That is if we take the classic scheme of either bank transfers or money transfer services without account opening. The main issue here is that such operations are conducted without opening an account. The way classic banking works is through account-to-account transfers that minimizes the commission on large transactions, but it is unsuitable for micropayments. And with the transfer system, you don’t need to open an account, but this increases the servicing costs and commissions even more. The system is aged, expensive to maintain, and requires lots of effort in terms of business processes, logistics and others.
Micropayments and microtransfers largely solve this problem. To achieve lower commissions cryptocurrency and Bitcoins are already being used and various financial companies employ development outsourcing to supplement their internal staff. Although such transfer can be cheap, there is virtually nowhere to spend this virtual currency. In 2017 we expect that online stores will catch up with the tech. We believe that this is highly likely because by sending $200 using Bitcoin you pay cents, and by sending a usual money transfer you can pay up to $20. And this is quite an incentive for customers. Nevertheless, there are nuances to be accounted for that can be a stalling point:
- a) the initial conversion of cash in cryptocurrency is still complicated
- b) payments in cryptocurrency are still not widely accepted
- c) cryptocurrency market is still highly unregulated.
Given the elevated hype around cryptocurrencies we see that:
- central banks are starting to look into the cryptocurrencies and implementing regulations to work with them
- local banks become more actively engaged in offering cryptocurrencies to customers.
All of this will support the trend in 2017 as more options and regulations come into place. It is very likely that the next year will see a liberalization of legal norms and laws to allow people to engage in easier and less expensive transfers and payments.
Automatization of personal financial processes. Digital purses
Next year is likely to see a rise in full automation of processes through a single mobile application used by customers. Such applications are already popular and many finincial institutions outsource FinTech technology services. They collect your credit cards information from different banks in one single place and offer you to pay for all utilities, commissions, fines and other services online. This allows for the creation of recurring payments that automate processes and remove human error from the equation.
Such online purses work as:
- an integrator of bank payments
- an integrator of recipients of these payments.
Portmone is a great example of such services, and it is constructed on the basis of Raiffeisen Bank. This is a value-added service that provides services automation and easy online access that is connected to a classic banking system to facilitate its work.
The rise of online purses follows the trend of automated online transactions, where the level of fees is lower than in the case of personal presence and payment in a physical bank branch. For banks, such system is harder to work with and less profitable as they are unable to offer and sell any extra services. And the people who use such services do not associate them with the bank, but with the intermediary which provides all vital functions.
In 2017 we expect to see a rise in t he number of consolidations of major digital purses on an international level that will have the power to choose with which banks to operate or not. This, in turn, will make banks provide higher quality services to customers. Nevertheless, such large digital purses will have the power to manipulate the financial market by cutting off some banks from their services. And this can be a serious factor of destabilization in the financial market.
Identity management & protection
Another key trend that we must note is identity management & identity protection. On the one hand, user identity data is a commodity that companies pay for, but the actual owners of data don’t get a cent out of these deals. This is troubling and in 2017 we are likely to see the rise of companies offering users to get various benefits for their personal data.
At the same time, there is not enough done to protect personal identity. The security practices seem to be in place, but they have loopholes and are not sufficient. It turns out that the monetization of identity accounts is done by some third parties, that find, collect, analyze and combine it for sale. As mentioned above the trend is to give the opportunity to earn on identity information to the direct owners like you and me, but this should also include firm controls regarding what information is shared, with whom and for how long do the third parties get to hold the data.
Another issue in FinTech is the use and development of advanced solutions to identify users online. That is especially important for lending, micro-credit, and insurance companies, as well as other financial services providers. Like it or not, we are not heading to a complete anonymity. The work on online user identification is being done on government and private levels with various degrees of success. This is one of the areas in which we will see lots of effort in the years to come as more and more people turn their financial lives digital.
On the one hand, we need to formulate the information that can be shared for various purposes. On the other hand, how can we maintain a proper privacy level, wherever it is needed? The banking system needs to identify you as being you to ensure reliability and security of online transactions. And with the ever-increasing number of devices we need to be able to identify these devices on a par with humans.
All of the above trends will require key stakeholders’ agreement to share the responsibilities coupled with the political will so that the unified digital financial world can prosper and develop. This is a positive outlook on FinTech prospects in 2017, but we firmly believe that through these processes have already gotten enough tractions. The technological expertise to devise and implement these trends is already there, and the last issue we need to take care of the willingness to move away from the old ways of doing business into the new online era of mobility.