Fintech will win the battle for the future of financial services

The world has experienced a seismic shift over the last year and a bit, and the effects are about to become evident as we start to move into a post-pandemic future. Financial services are one sector where we are seeing major changes, especially in the role that fintechs play in the world of money.

In the Deloitte study ‘Fintech 2021’ a ‘second wave’ of fintech activity is predicted and the authors write: “Despite the Covid-19 pandemic we appear to have entered a new phase in the evolution of the financial technology sector.”

To start with the traditional financial institutions are pursuing partnerships with fintechs, or those identifying as technology companies, so that they can access new markets. The fact that more of these institutions are now engaging with digital assets is a clear sign of this. Visa’s CEO Al Kelly recently stated why his company is moving in this direction: “We’re trying to do two things. One is to enable the purchase of bitcoin on Visa credentials. And secondly, working with bitcoin wallets to allow the bitcoin to be translated into a fiat currency and therefore immediately be able to be used at any of the 70 million places around the world where Visa is accepted.”

Morgan Stanley is another giant that is moving in a crypto direction. It is  “eyeing up a $441m play for a stake in South Korea’s largest digital asset exchange, Bithumb,” writes Maxim Bederov, who then points out that Bithumb’s exchange volume “recently exceeded mainstream equity stock market volume.”

Morgan Stanley’s move came only days after its analysts published a report: “The Case for Cryptocurrency as an Investable Asset Class in a Diversified Portfolio” arguing for a 2.5% allocation for sophisticated investors. It also noted that cryptocurrencies as an asset class, “has crossed the critical thresholds of market liquidity, regulatory scrutiny and institutional acceptance.”

Who else is buying? Paypal has confirmed it is buying crypto-security firm, Curv, on top of providing a crypto buying service to its users. And we are likely to see many more mergers and acquisitions in this space “as power consolidates upwards from crypto-asset startups to institutional giants.” Bederov says.

And, after the Covid crisis we are also seeing a major shift to cashless societies: an outcome of the fear surrounding touching coins and bank notes which were seen as a source of spreading the virus. As a result, there was massive growth in the use of contactless payments. In the UK, the limit for contactless payments was elevated twice in the past year. The limit increased from £30 to £45 in March 2020 (a modest 50% hike) then by over 120% in March 2021 to £100.

Consumers are moving away from cash at record speed, according to a major new report by FIS Worldpay. The annual 2021 Global Payment Survey found that e-commerce exploded in 2020. The use of cash has declined by 42% since 2019, and the report says cash will be the least-used traditional payment method within four years. It also states, “by 2024, digital wallets, credit and debit cards will account for 84.5% of e-commerce spend.”

Bederov concludes by saying, “Whatever results in the near term, this powerbase tussle between cryptocurrency, cash and central banks will be the defining fintech battle of 2021 and beyond.” The signs are good for a fintech victory.

HSBC challenges fintechs with digital wallet

Major bank HSBC is challenging its fintech rivals by launching a multicurrency digital wallet, called HSBC Global Wallet, which will enable businesses to make simple and secure international payments.

The digital wallet is first launching in the US, the UK and Singapore and offers payments in Euros, sterling, Hong Kong dollars, Canadian dollars, Singapore dollars, Australian dollars and Malaysian ringgit. Curiously, there is no mention of US dollars!

According to reports, HSBC clients will be able to send money in a number of currencies, and hold and manage those currencies. However, the ability to receive payments will only be added later this year.

This is the latest in new product offerings from HSBC intended to appeal to its more digitally-minded clients. Last November it launched a free mobile-based service that customers can use to hold, manage and send funds in various currencies to HSBC customers in over 20 markets, 24/7 and in real-time without incurring any fees. This product –the HSBC Global Money Account – was aimed at wealthier customers, whereas the new digital product is primarily for small- and medium-sized businesses with international supply chains.

Diane S Reyes, HSBC’s global head of liquidity and cash management, said, “HSBC Global Wallet makes it just as easy for our customers to deal with a supplier or a client on the other side of the world as it is to deal with one on the other side of town.” She added, “By fully integrating this solution into our everyday business banking platform we’re giving our clients a virtual presence in markets around the world.”

What we are witnessing is an attempt by the banks to claw back business lost to fintechs, such as Transferwise (now Wise), Revolut, N26 and others that offer their customers borderless accounts. Even Santander bank in the UK is offering its PagoFX app to the UK retail market and sole traders, and it is also available in Spain and Belgium. The focus of the Santander app is on easy international payments with transparent fees and exchange rates.

This all sounds good, but there is one thing they have forgotten and that is cryptocurrencies and stablecoins. PayPal has moved into crypto and so have the major card networks, such as Visa and Mastercard. There are others as well. So, whilst the banks are attempting to appeal to those customers who moved to the new digital banks and draw them back (which remains to be seen, as HSBC doesn’t have quite the same hip appeal as Revolut), there is a swathe of people who want more advanced features, such as being able to earn money on crypto, lend or borrow against it, and trade it, all in one place.  No doubt, HSBC’s new products will gain traction with its loyal customers, but whether it will win them new ones is another matter.

Banking uses more energy than Bitcoin

When super-tweeter, Elon Musk, announced nobody could pay for a Tesla with Bitcoin because of its detrimental effects on the climate, it caused upheaval with a downward trajectory in the crypto market. It probably seemed rather disingenuous of him to many, as he must have been aware of the energy usage in mining Bitcoin when he invested a billion or so in it and said people could buy a Tesla with Bitcoin. He also needs to look at the recent research study by Galaxy Digital shows the leading crypto is not the biggest climate culprit in finance.

Last week Galaxy Digital Mining released a report titled “On Bitcoin’s Energy Consumption: A Quantitative Approach to a Subjective Question.” They also provided open-source access to their research methodology and calculations. Here are some of the figures.

Galaxy’s mining department estimates Bitcoin’s annual electricity consumption to stand at 113.89 TWh. This includes miner demand, miner power consumption, pool power consumption, and node power consumption. It may seem like a lot of energy, but the banking system and the gold mining industry use twice as much as that every year.

A Galaxy bar chart shows that bank branches, ATMs and card networks use a relatively smaller amount of energy, but the banks’ data centres are massive energy consumers. Given Galaxy’s estimations of power usage by banking data centres, bank branches, ATMs, and card network’s data centres, the total annual energy consumption of the banking system is estimated to be 263.72 TWh globally. 

Furthermore, Bitcoin’s energy consumption is easy to track. You can look at it on the Cambridge Bitcoin Electricity Consumption Index for example. Whereas, trying to track the use of energy in gold mining or banking services is really quite difficult, because banking certainly doesn’t report the energy it uses.

The gold industry utilizes roughly 240.61 TWh per year, according to the Galaxy report, based on the World Gold Council’s data in its report, “Gold and climate change: Current and future impacts.” 

Returning to Musk’s statement that he was concerned about the impact of Bitcoin on the environment, which rightly provoked a barrage of fury from the crypto community, perhaps somebody can inform him that whatever bank he uses is doing far more damage. It would be great if he had the courage to tweet that out and set the record straight.

Banks oblivious to clients’ app-led, shadow financial lives

Information gleaned by Cornerstone Advisors in its recent study reveals “Much of consumers’ day-to-day financial lives take place “off the radar” of the traditional financial institutions that they work with.” Whilst the study carried out in October 2020 is American, it seems likely that the results are echoed in other countries and regions.

To start with, 76% of smartphone owners use fintech-created mobile apps to manage their finances, from companies such as Robinhood, PayPal, and Credit Karma.

The generational differences in use are predictable: “93% of Gen Zers and Millennials (21 to 40 years old) use mobile financial apps, 81% of Gen Xers (41 to 55 years old) are fintech users, and even 56% of Baby Boomers use at least one mobile app to help them manage their financial lives,” the study states.

Banks unaware of new customer behaviour

However, the research does throw up some surprises. It points out that although traditional banks are aware of the growth of consumer use of fintech products, they are much less aware of the ways in which this impacts them. Banks have lost some business to fintechs, but they also share customers with fintechs, and this appears to be something they are blissfully unaware of. Ron Shevlin in Forbes says, “ They think that because customers have an account with them that they’re the only bank their customers do business with.”

That is certainly not true. Consumers “don’t close out and switch accounts—they simply add another account,” the study says, and “Challenger banks – Chime, most prominently – are gaining market share among consumers and are rated extremely highly by consumers on the value they provide.” As a result, a quarter of a trillion dollars annually is flowing through payment mechanisms outside of those provided by traditional financial institutions.

Shevlin also cites the story of HNWI behaviour. One bank CEO urged a client to diversify his $5 million investment account. The client’s response was “you have my funny money—my play money. The majority of my holdings are with a different investment management firm.” This is called a ‘shadow financial life’ that is defined as “Financial behaviors and activities that evade observation from the other financial institutions they do business with.” Mobile apps play a major role in helping to create clients’ shadow financial lives.

For example, , 30% of Americans with an investment account (25 million) also have an account at a digital brokerage or robo-advisor, e.g. Robinhood, Acorns, or Stash. Furthermore, one-third of JPMorgan clients and 27% of Merrill Lynch clients have an account at a digital brokerage or robo-advisor – and the big guys don’t know anything about it.

Another factor in shadow financial lives is the adoption of digital bank accounts as a second string. About 1 in 6 Americans have second bank accounts with digital-only challenger banks, and amongst consumers with three checking accounts, 30% of the third account are at digital banks.

How does this impact on the traditional banks? First, Americans with more than one checking account keep a lot of their money in their additional accounts, as much as 35% of their total deposits. And those with three accounts, keep an even larger amount of money in their secondary accounts. The second and third accounts are also preferred for making payments by 1 in 4 consumers.

Digital banks are not completely immune from shadow banking. Among consumers who consider a digital bank their primary bank, 42% have more than one account—and half of them have that second account with a traditional bank.

Shadow finances change banking scene

One consequence of the emergence of consumers’ shadow financial lives, largely enabled by financial mobile apps, is that the function of a current/checking account has dramatically changed. It also means that the banks with  ‘primary’ account status no longer have the same opportunity to deepen customer relationships, as the customer is now more interested in “best-of-breed features, not accounts,” Shevlin says. Consumers now want the new savings apps, because they don’t want a savings account – the want to save more money, a service the apps supply. Laslty, banks still believe that marketing accounts, savings and other types of accounts are the most important focus, whereas the truth is that for everything they offer, the consumer replies, “There’s an app for that.”