CHALLENGES AND ROADBLOCKS FOR FINTECH COMPANIES

Next to business models relying on assumptions that might turn out to be wrong, FinTech companies have other roadblocks to overcome. Some of them are the lack of a human interface, the need for banking licenses, and the question whether data is in safe hands with technology companies.

1.3.1 Lackofahumaninterface

Most people are by nature risk-averse—as we will discuss later in more detail—and they dislike taking risks with their capital. At the same time, they want convenience and ubiquitous banking services, without understanding that the two are sometimes a trade-off. Banking might not have much in common with flying, but let us think about an analogy for a second: even though most airliners are mostly on autopilot nowadays, people feel safe when they know there are knowledgeable pilots in the cockpit and crew on board. They may never see them in person during the entire flight. Still, most passengers would be deeply troubled if there were no in-flight crew on the plane. Even though someone could remote-control a plane masterfully, flying without a pilot and crew on board feels unsafe. A similar approach still exists with financial services. Speaking with a trusted financial advisor or loan officer in person often beats interacting with robots and computers. The fact that the entire back office is fully automated is of little concern, as long as there exists a human somewhere in the process that customers can talk to.

When it comes to money, emotions play a vital part. Earning money with automated financial services that need little human interaction is only one part of the equation. The more important part is convincing mainstream customers that they are safe or even safer than the existing service that their banker or financial advisor provides. Sure, financial technology has already attracted much interest, to the point that banks should start to worry about it.

Imagining financial services as a hands-off affair still seems a long shot, and that is exactly what financial technology innovation is about: changing the way customers bank and transact in the next five to ten years, not immediately. Granted, few FinTech startups have mastered both their operations and their customer service to the point where they measure up to what customers expect from banks. However, this may change soon. The driverless car seemed like a science-fiction prophecy until Google announced a fully functional prototype in 2014.¹6 Most major car companies are now working on similar technology, and most of them have an office in Silicon Valley to be close to the innovation.¹⁷ Exactly when the first driverless car will become commercially available is in the stars. One thing we can be certain of is that when it hits the market and is successful, it will transform the way people think about driving. The same will happen in the financial sector: when one or several services together have solved our psychological attachment to speak with other humans about our financial affairs, they will take off. When they have achieved critical mass, people will have difficulty remembering how they could ever do without them. That is the moment that banks fear, not the spotty, early-stage innovation that only technology evangelists are interested in.

1.3.2 Theneedforbankinglicenses

How easy is it to get a new banking license in a major financial center nowadays? In most instances, it will be very expensive or even impossible because big banks firmly rule the scene. Getting the license is just the beginning; the tough part will be compliance with banking regulations. Banks have massive existing infrastructure to deal with regulation already set up.

1.3.3 Concernsoverprivacy

Financial institutions have the reputation of being vaults for people's sensitive information. Even though this notion has softened slightly in the wake of high-profile data leaks and tax prosecution, most people expect banks to guard their information more safely than a social network would. Keeping secrets is actually at the core of the business model of banks. At the same time, this information can give banks insider knowledge. When information about investment opportunities is less accessible, markets become less efficient, and insiders increase their profits. By regulating the flow of information, banks may actively tilt the odds in their favor.^[18] The opposite is true for technology companies. Their users' secrets are an asset they exploit as much as possible. As some believe, personal data will be the “new oil”—a new emerging asset class of the 21st century, that will touch all aspects of society.^[19] Contrary to their reputation as secret keepers, banks are actually also selling information about their customers. Barclays Bank sold information about the spending habits of 13 million customers to other companies.^[20] These data included images of customers, recordings of their voice, customers' comments in interactions with the bank on social media sites, and location data from mobile devices.

User data have become a resource in business beyond the realm of tech companies. Nevertheless, when a customer discusses details about her spending habits with a bank officer, she might share information more openly than on a social network. As an industry, banks still benefit from their reputation as guardians of secrets. The air of trust that a proper branch network radiates is hard to replicate for technology companies. Tech firms have to overcome the stigma that they exploit user data with little regard for privacy, even though they are hardly the only businesses doing so.

1.6 Fintechisalong-Termplay enlightened approach to working with FinTech entrepreneurs. This is in their own best interest. We will discuss the hybrid financial sector in more detail in Chapter 16 of the book. The next chapter homes in on online lending and how it works in particular.