Millennials: Good News for Fintech, Bad News for Banks

Tuesday July 17, 2018

For decades and even centuries, people have put their faith into big, powerful banks to manage the bulk of their financial needs. Lately it seems that the “too big to fail” banking system is now failing many, specifically young people. Millennials in particular are fed up with traditional banks and now turning to financial technology to replace a system they see as outdated and untrustworthy.

Who are Millennials?
Millennials are the largest living generation in the United States, born between 1980 and 2000, and 84 million in number. Heavily influenced by the sudden surge of technology in their time, millennials’ view of the world varies greatly from that of previous generations. Millennials are by far the most educated generation, and are characterized as being more ambitious, open-minded, and optimistic than their predecessors of Generation X and the boomers.

Millennials and Banks
According to a Facebook data survey, only 92% of millennials actually trust banks, and many view them as an unreliable source of misinformation. After watching the financial market go down in flames in 2008, it’s no wonder that millennials have a hard time putting their faith into a seemingly faulty system. Many millennials were advised by banks to take out massive student loans only to find themselves entering into a sparse job market knee-deep in debt.

Notorious for their impatience and desire for instant gratification, millennials are turned off by the complexity of banks. Complicated jargon and formal procedures are a deterrent for your average millennial, who is much more versed in the language of technology. Automatic wealth management services are now becoming increasingly more popular as millennials are more apt to trust an algorithmic code in the form of a robo-advisor than a human financial advisor.

Millennials and Fintech
Having grown up on technology, Millennials report feeling more comfortable using financial technology to help them manage their money than an actual bank. According to findings from the Millennial Disruption Index (MDI), “Over 70% of millennials say that they would be more excited about a new offering in financial services from Google, Amazon, Apple, Paypal, or Square than from their own nationwide bank.” Names of giant banking moguls such as JPMorgan and Wells Fargo are now being replaced in young financial vernacular by titles of Fintech startups like Venmo (a digital wallet platform), Simple, and Chime (Mobile banking applications).

Millennials feel as though banks do not fully understand their financial needs. Fintech companies are taking advantage of this disillusionment by offering new, far-reaching services that touch on everything from investment platforms (Acorn, StockTwits) to stock trading services (Robinhood), to a debit card and personal money coach (Moven). These services appeal to their young audiences by promising to eliminate “ridiculous” fees added on by banks and replacing “old school” practices.

On the verge of many life events such as marriage, having children, and buying a house, millennials have many financial needs that must be taken seriously. It is clear that this tech-savvy, forward thinking generation needs more than what banks are offering them. Financial technology companies are now recognizing this need and taking steps toward helping millennials feel like they have a supportive partner in their financial quest.

From Cash to Connectivity: The Rapid Rise of Mobile Banking in Africa

Tuesday July 17, 2018

The unconventional progression of financial development in Africa has been a hot topic of discussion for some time now. While it is true that the rate of financial growth in Sub-Saharan Africa falls far behind even that of the rest of the developing world, interestingly the continent has been swift to advance in the world of financial technology. Africa seems to have skipped over the stage of traditional banking and credit cards and jumped straight from a cash-dominated system to the world of mobile banking.

It’s no secret that cash rules the financial microcosm in Africa. Studies show that 94% of all retail payments across Africa (urban and rural), are being conducted using paper money. Underdeveloped banking infrastructure coupled with distrust in credit banking are the main motivations behind such high volumes of cash flow in Africa. The system is disadvantageous, as cash transactions are often tacked with extra fees to cover storage, security, and transportation of the sums. (McKinsey, 2014)

With such heavy reliance on cash transactions, the rise of banking in Africa remains sluggish. In 2014, it was noted that an astounding 66% of Sub-Saharan Africans did not have a bank account (Elixerr Partners LLP, 2018). So why is it that Africa, nicknamed the “unbanked continent”, lags behind in comparison to the rest of the banking world?

  • Fragmented Infrastructure– Accessibility is vital to uphold a uniform banking system. In many African countries rural areas and remote roads make it difficult to develop the type of cohesion needed to support a successful banking sector.
  • Political Instability and Distrust in the Judicial System– Many Africans fear fraud or are apprehensive that their transactions will not arrive to their determined destination. In addition, most credit cards in Africa are equipped with traditional magnetic strip and lack the extra layer of protection that a security chip ensures.
  • Low Income Levels — Large populations in Africa do not have the money required in order to open a bank account.
  • Lack of Financial Education– High percentages of Africans are unaware of the financial opportunities that are available to them.
  • Inconvenience– Physical inaccessibility of bank branches ensues added travel costs. Absence of efficiency in the existing branches contributes to long bureaucratic processes and excessive wait times

It is clear that a traditional banking system is not an ideal fit for the diverse needs of the African continent. Frustratingly, however, for a long time, banks and credit unions have been the only non-cash options for business and personal transactions. Recognizing the gap in the system, Fintech and telecommunications companies have teamed together to make a giant leap forward toward mobile banking in Africa.

The mobile phone revolution swept the African continent with gusto and force, arming 2/3 of Sub-Saharan African adults with a handheld device. (McKinsey, 2014). Advances in the telecommunications sector, coupled with the launch of financial technology created a perfect breeding ground for a mobile banking insurgency in Africa. Mobile network operators (MNOs) are prolifically spreading their influence with a low-interest, accessible, and digital method of financial transacting.

The scope of MNOs is far reaching, penetrating even the most remote areas in Africa. In 2007, Vodafone developed M-Pesa, the largest and most commonly used mobile money payment system that is now used by 3 million users in 10 countries (Elixerr Partners LLP, 2018). The inclusion of formal financial methods allows people to not only save money, but also increase their financial literacy. The benefits of MNOs are not only limited to the individual, but to banks as well, who profit from the economic boosts offered by the new technology.

Although in the early stages, mobile banking offers promise for financial inclusion for many Africans. Moving away from cash transactions and toward mobile banking allows people to better plan for the future and manage their finances more efficiently. This in turn creates a more stable and ascending financial development trajectory for the African continent.

What’s the Holdup?

Tuesday July 17, 2018

Banks have been the big shots on the financial playground dating back as far as the 14th century during the Roman Empire. In the centuries following, banks developed into a societal pillar of financial stability, responsible for foreign exchange, money lending, transfers, and credit systems. It’s no wonder then, that with the rich history and long lineage of ancestry that banks boast, that they are reluctant to include the new kid on the block: the crypto industry.

Banks are very regimented institutions embedded with a strong network of safety regulations and bureaucratic measures. After the financial crisis of 2007, banks became subjected to an even tighter grip on security and a less-than-flexible regulatory culture. In contrast, the crypto industry is unregulated, novel, and lacks the experience that banks have to back them up. For this reason, banks are hesitant to join forces with crypto, creating a culture of friction, rather than inclusion.

Banks are still trembling in the after-shocks of the economic blow of 2007, causing them to retreat further back into their safety zones. Innovative technology and new ideas may seem like a hurricane threatening to tip the fragile boat of banking that is struggling to stay afloat. The fact that the crypto industry is not only novel, but also unregulated, poses a threat to banks, who are fearful of ending up with major fines due to failure to comply with the rules.

Posing an even further challenge toward inclusion of crypto culture is that banks rarely act alone. Most banks have correspondent banks checking up on them to make sure they are doing their job in an orderly and predictable fashion. Each decision that banks make must be approved by their correspondent, who often times acts like a strict parent exerting their authoritative influence over their offspring.

It really is a shame for both sides that acceptance of crypto and Blockchain into the banking world has been slow to barely existent. Crypto has much to offer banking by solving their fundamental problems efficiently, as well saving and earning banks a great deal of revenue. Crypto infrastructure can not only help banks make more money, it can also help them save money by simplifying and digitalizing tasks that banks now outsource and pay large sums of money for.

By rejecting the crypto industry, banks are missing out on an opportunity to earn more money in the future from existing clients. While industries around the world are adopting Blockchain for data transferring and logistical purposes, the pressure amounts for banks to do the same. This is not the case however, and banks continue to hold on tightly to rigid and outdated methods. This creates a gap in the investor relationship due to the bank’s failure to meet consumer needs.

Undoubtedly, banks are beginning to flounder as the times change. Branches are continuing to close, and banks are making desperate attempts to create newer services to cater to their customers’ needs. The irony is that while banks are struggling to adapt, they stubbornly remain stuck in their old protocol, refusing to include the crypto industry, which might just be exactly what they need.

It’s time that banks keep up with the times and get with the program. Crypto is the way forward for banks and a lifeline that shows promise toward long-term survival.

Blockchain: The Game Changer

Tuesday July 17, 2018

What is Blockchain?
Blockchain began as a part of the cryptocurrency language. In the simplest terms, a block is a record of recent transactions. Once a block is completed, blocks enter the blockchain permanently. Also, once a block is completed, new blocks are immediately created. Blocks are connected chronologically, and each block contains a ‘cryptographic hash’ from the previous block, a time stamp and all transactional data. Therefore, a blockchain contains all transactional information from the first block, until the most recent one.

The most impressive part about blockchain is that blocks can never be deleted or copied. Each block is created through complicated cryptography to ensure its legitimacy. Blockchain can also be distributed. These databases are managed independently and designed in this way in order to eliminate the need for a third-party. Transactions are conducted through a peer-to-peer (P2P) network. Individuals who participate in transactions are those who validate the legitimacy of the other party when one person pays for something else.

Saying Goodbye to Third Parties
In almost all business transaction, we rely on third parties: banks, governments, schools, lawyers, and more, to keep legitimate and official records about all transactions we make. Transactions do not just include financial. Transactions can be certifications, assets, digital rights, intellectual property and these days, even votes. In today’s climate, individuals have lost massive amounts of trust for third parties. With bank scandals, low government ratings, financial crises, and more, it is understandable that people are looking for a new appealing alternative.

This is where blockchain comes in. Blockchain does not rely on any individual or organization. The only thing to rely on is the blockchain system. This innovative system holds the power to change the world. At large, blockchain could help the population re-gain trust in companies, and in one another. It has the potential to reduce economical friction and create new ways of conducting business.

Smart Contracts
Out of the blockchain technology came Ethereum, a complex blockchain program. If you’ve ever hear of Ethereum, you’ve probably heard of their revolutionary ‘smart contracts.’ In short, more complex blockchain technology has the capability of processing commercial transactions. Usually smart contracts are thought of as ‘self-executing legal contracts’, in other words, real contracts in digital form. Smart contracts are their own small program hardware stored inside of blockchain so again, no individual or third-party is in charge of the money. Blockchain holds funds until a certain goal is reached or obtained, and only then are the funds released. Smart contracts add a whole new level to the capabilities of blockchain technology.

Where is Blockchain Headed?
There are endless possibilities for blockchain technology. Commonly, we see blockchain connected with cryptocurrency and financial industries, but what does this really mean for our world? Blockchain can provide a payment infrastructure to send money around the world and pay merchants with cryptocurrency. Blockchain can also be used to create digital assets such as stocks, bonds, and even frequent flyer miles.

Due to its strong security properties, blockchain can be used as a recording ledger for any company’s transaction history. Analysts are also seeing blockchain as a secure service to conduct voting. There is no tampering and it would ensure the fairness of any organizational or governmental election.

We must remember that the blockchain technology is still very new. It could be a long period of time until we see blockchain in its prime. Blockchain offers the world a wide range of opportunities in the future and its impact could be massive. It has the ability to completely revamp our entire economy by improving efficiency and safety in transactions and storing sensitive information.