This is the first in a series of blogs we’ll be doing about the impact of technology on different industries. Today, I’ll be discussing the impact of technology on financial companies. This is one of my favorite subject matters as many of my clients before starting Flying Donkey were financial institutions. The last decade or so has been an extremely turbulent time for companies. Ever since the 2009 mortgage crisis swept the globe there have been advances in technology that are rearranging the financial industry. Some of these developments include:
- New third party payment processors
- New Lending methods
I’ll discuss aspects about each of the previously mentioned areas, then discuss Primesolve, one of the clients we currently assist with their financial modeling software.
Cryptocurrencies first came into public awareness in January 2009 with the release of Bitcoin, a digital currency using blockchain to decentralise ledgers and the monetary system. For most of the time bitcoin has been a speculative investment by people in the tech industry and people against centralised monetary systems, but its popularity spread to popular culture in 2017 causing a rapid growth in value followed by a bubble.
While cryptocurrencies have not matured to the point they are currently a threat to financial institutions, over 1/3 of small businesses accept cryptocurrency as payment and almost 60% utilise it for payments. That’s a substantial change over the past decade. Finding ways to decrease the cybersecurity risks involved with this technology are crucial for companies and banks to be able to integrate this technology safely into their existing portfolios of services/products. Once this challenge is overcome costs will be reduced for transactions and hopefully companies can increase net income while reducing costs to customers. With all the big banks, Square, IBM, Microsoft and a variety of others looking for the way to best utilise this technology, it’s only a matter of time before someone will create the breakthrough that makes this a game changer.
For a long time the payment processor market was a duopoly with Visa and Mastercard handling almost all card transactions starting in the 1950s when the two were originally started by regional banks and expanded to become the major players in the industry.
With the internet explosion other processors, like Paypal, AliPay, and Square, came into the picture increasing the options and giving businesses a wider variety of products to fit their business needs. Now finding the right payment processing option requires a specialist to make sure you get the best value for your business.
Then Apple, Samsung, Google, and other cellphone companies started jumping into the payment game by offering products like ApplePay and Google Pay where you don’t even need your card on you; over time, I would expect the market to consolidate to take advantage of economies of scale.
Major banks, venture capitalist firms, family, and regional short-term loan vendors were once the originators of most loans. Since the 1990’s banks have only increased their share of loans in two categories: Commercial Real Estate mortgages (excluding multiple family residential complexes) and Agricultural Loans in the United States, but Australian banks are losing market share to nonbank lenders in these fields too.
Today there are a variety of other ways to access capital markets:
- Online banks
- Peer-to-Peer loans
- Consumer credit through payment processors
Online banks are advantageous, they operate much like the legacy banks we are used to. They don’t have as many branches that have to be staffed, they save the business and customers money by reduced labor costs. As these institutions are younger and still developing. They may not have the same products and services as major banks, but often offer higher interest rates on savings and other accounts. In addition, they offer lower interest rates on loans at times.
Peer-to-peer loans are another online method of accessing capital. These work by the organisation offering an online platform for businesses and lenders to offer loans of up to $3m AUD (most are less than $100k) for 6 months-5 years. The peer-to-peer platforms make money by charging the borrower a fee and keeping part of the interest received monthly. The interest rates tend to be higher than what you will receive from banks, but it opens up capital to businesses that may have not qualified before.
Many smaller businesses struggle to sell some of their products due to the costs of purchase. Companies like PayPal have started allowing companies to offer consumer financing while mitigating the risk. This has the potential to allow many industries and companies to increase their revenue. Financing through companies that consumers and businesses trust, makes shoppers more likely to accept the financing than if providing sensitive information to a less developed company.
Financial service companies can benefit from these technologies in a variety of ways:
Create new streams of revenue by investing in them
Selling them services they don’t currently have
Or potentially get higher savings rates by utilising them.
In addition, if loans are unachievable through the larger banks or government programs, they offer a new source of funding.
Our Work with Financial Companies
All the technologies discussed offer opportunities for financial service companies to increase their revenues, margins, and customer satisfaction. This requires software solutions that offer their employees and clients more functionality on a regular basis. They also need to perform financial models to consider the benefits and risks associated with various options.
Each of these technologies offer opportunities for financial service companies to increase their revenues, margins, and customer satisfaction. Achieving the benefits require software solutions that offer their employees and clients more functionality on a regular basis. They also need to perform financial models to consider the benefits and risks associated with various options.
We have been working with Primesolve to create a custom financial modeling software to help financial advisers reduce the time it takes to prepare a financial plan for their clients’ unique goals and financial scenarios. Learn what Flying Donkey did for them at PrimeSolve Case Study.
I’m Mat with Flying Donkey and thank you for reading my take on how technology is impacting the financial industry. If you’d like a free consultation, fill out the form here and tell me what you are trying to achieve and when is a good time for a call.