The internet has changed how we manage our money and is aiding financial exclusion around the world. The number of adults worldwide with access to a bank account through a traditional institute or a mobile device grew by an estimated 700 million between 2011 and 2014, according to the World Bank, which allows more people to adopt digital solutions when they transfer money around the world.
The growth of mobile technology has been able to drive change within the financial industry. If you think back even five years to the capacity of your mobile phone, the advancements are mind blowing. According to Ofcom, 66 per cent of UK adults now own a smartphone and Azimo’s data shows the percentage of transactions sent from a mobile device more than doubled in the previous 12 months to January 2015.
If we’re not using our mobiles to get directions or work out the best tube to catch, then we’re transferring money between accounts via our bank’s mobile app. We’re rapidly moving towards a cashless society and the way we use money day-to-day is likely to be different again in another decade. Recent research by Azimo showed that 26 per cent of 18 – 34 year olds prefer banking online and this figure is likely to rise as new generations embrace online finances. Payments via social media will be embraced by millennials as leading companies such as Facebook and Snapchat enter the market. Recent findings from Juniper Research found the number of mobile money transfers is set to increase by 150 per cent in 2015 to more than 15 billion with social media firms noting a rise in usage.
In developing countries, mobile technology has been a driver of financial inclusion and has helped people manage their money more quickly and efficiently than using the traditional banking system. This helps fit finances around our daily lives and has made a real difference in spreading the world’s wealth. Fintech companies have also tackled the problem of many people around the world not having a bank account and therefore being unable to send and transfer money internationally.
The recent struggles of the big banks also contributed to the disruption of this market. It felt like a turning of the tide after the financial crisis hit in 2008 with big banks destabilised and customer confidence at an all-time low. All of a sudden banks were under more scrutiny than ever before and were held back by increased regulation and fines. Emerging companies had chance to get a foothold and challenge the old regime. Advancements in digital technology allowed these startups to move faster than the traditional banks, while access to more in-depth analytics allowed new firms to pinpoint what their customers wanted and to deliver it quickly and efficiently. This removal of the expensive branch and office network is one of the biggest benefits the technological revolution has provided. Alternative and particularly online money transfer services are easy, low cost, fast and secure – offering a real alternative to the customer.
It became cheaper than ever before for competitors to the banking system to emerge and the sector has become ripe for massive investment and growth from Venture Capitalists. Last year, investments into fintech startups quadrupled, from over $3 billion in 2013 to $12 billion in 2014. Interestingly, investment from crowdfunding, itself part of the fintech revolution, has the potential to bypass venture capital investments in the sector by 2016, showing it’s an industry with the support of the people.
The UK has become a great place for fintech companies to thrive and has carved out a niche specialty in international money transfers, digital currencies and peer-to-peer lending with London becoming a hub for investment and developments. While the UK needs to further invest in tech education for young people to ensure it stays on top of the curve, its proximity and desirability to the European workforce ensures London has a strong core of tech literate workers able to aid the growth of fintech companies. The nature of the European money transfer market, with its multiple money channels and mobile-savvy customer base, has also meant it’s more open to disruption from new digital firms than the US which remits to a smaller number of countries.
Unlike previous technology deployments in financial services, which were geared towards companies making money, the consumer is now at the centre of the user experience. Digital money transfer companies are utilising the technology used within big banking and are implementing it lower down the chain to smaller markets. Apps, social-media integration and digital wallets have allowed the movement of money across borders to be faster and offer a freedom of finance that wasn’t available before. While banks or traditional money transfer companies could charge high fees in the past, these have been slashed with digital advancements. Mobiles are now an entry point for accessing money around the world, resulting in the democratisation of banking and increased financial inclusion for developing countries.
According to The World Bank, an estimated $450 billion in money transfers was sent to developing countries, primarily by hard-working migrants who send money home to support their families. Traditionally, the industry is dominated by global corporations such as Western Union, MoneyGram and high street banks who charge on average between 7-9 per cent to send abroad. Fintech has disrupted this industry and dramatically reduced costs. Cryptocurrencies such as bitcoin and Coinbase have emerged as another avenue to challenge the status quo although, doubts still remain around anonymity and security, which have so far prevented more widespread adoption.
There are still several challenges ahead: increased regulation and the de-risking of the banks presents problems for money transfer companies who need a centralized account in order to hold and transfer funds. The number of money transfer firms across Europe has fallen from around 2,500 a decade ago to around 350 today. The firms that remain, though, are helping to reshape an industry that for too long was controlled by a minority. It’s an exciting time for the sector as accessibility to fintech is driving innovation. Existing payment infrastructures and instruments are better connected, while electronic payments can open up territories and channels that weren’t previously accessible. We’re at a tipping point in the industry and the next 12 months will see even greater changes emerge.
Michael Kent, CEO, Azimo