In the near future, banks will no longer be on street corners or housed in high-rise towers, they will be in our pockets or on our wrists.
Mobile banking is going viral, and the first adopters are the “millennials” (those born after 1981) and the “unbanked” poor of all ages around the world. They are leaping into this brave new banking world first, but the rest of us are going to follow.
I was in New York last week to take part in a conference held by Silicon Valley’s Singularity University on the bank of the future. Traditional banks will be replaced with low-cost tech solutions, and there will be cheering from the sidelines. Viacom Media polled 10,000 Americans and found that 4 of the 10 least-loved brands in the U.S. are banks and 71 percent said they would rather go to the dentist than listen to what any bank says.
Enter “fintech”: a burgeoning industry that includes Apple, Facebook and 8,000 start-ups in the U.S. that are targeting the financial sector’s various profit centers. Within five years, smartphones or smartwatches will replace credit and debit cards, wallets, (keys), lenders, brokers, insurance agents and money transfers abroad.
“Billions are going into these startups,” said Victoria Vysotina, a mathematician and CEO of VV Strategic Group in New York City. “The LendingClub and other peer-to-peer lenders are expected to get 30 percent of the loans business in the United States in a few years.”
She believes credit cards will be replaced with phone payment schemes. One banker noted to me that the “killer app” is a company called Kash, designed to circumvent the credit card network and its high fees. It is, ironically, financed by a company run by Joe Saunders, former chairman of global credit card giant Visa Inc. It will be a debit card that instantly takes money out of a user’s bank account (or digital wallet) and deposits it to the vendor, charging vendors 0.25 percent per transaction instead of up to 4 percent.
Further down the road, asset management, and hedge funds, will be replaced by online cheap or free ETFs (exchange traded funds). Wealth management will be done online by robo-advisors, and investment banking will be disrupted dramatically by crowdfunding when U.S. regulators give the green light shortly to the sale of equities. “And there’s nothing the banks can do about it,” she said.
Strangely, Kenya and telecom-tech giant Vodafone are the world’s pioneers in the repurposing of tech to replace traditional banks. Kenya’s banking system is so badly broken and inadequate that Vodafone started a cellphone network called M-Pesa (Swahili for Mobile and Money) and 60% of the country’s adults have joined, some 17 million. Users can deposit, withdraw, transfer money and pay for goods and services with their mobile device. Deposits and withdrawals are made at cellphone retail outlets or with phone sales personnel, acting as banking agents. It’s now in Afghanistan, South Africa, India and Eastern Europe.
Another multi-billion dollar market is “remittances” or money sent home by workers abroad. Western Union dominates this $583 billion a year transfer of funds and collects transaction fees of 9 percent. Facebook is getting into this market and believes it can make money charging only a fraction of 9 percent per transaction.
In May, another Silicon Valley giant weighed into the banking space. PayPal and Yelp founder, and Yahoo director, Max Levchin has launched Affirm. This lending system will replace credit cards and banks — aimed initially at the 82 million in the U.S. who are “unbanked” because they have no credit rating or are immigrants, new citizens, students or inexperienced.
Users will join by simply submitting a name, mobile phone number, birthday, and the last four digits of a social security number. Affirm can establish reliable creditworthiness and customize loan limits by using analytics that evaluate the borrower’s online and social network behavior.
Approved shoppers will be able to borrow money at the point of sale to buy goods and services, and will be told upfront how much and how many monthly installments they must make. “There’s no compounding interest, hidden fees, or debt calculators here. This is a simple, fixed-term loan, and the approval is in real time, so you know how much you’re borrowing, and what your payments will be each month, before you make your buying decision. We think of it as the future of honest finance.”
“I wanted to make a bank that didn’t suck,” said Levchin in an interview. And so apparently do millions more consumers. That’s what the technology sector has identified and that’s why the world’s biggest “banks” will be technology companies.
Diane Francis is Adjunct Faculty at Singularity University, Editor at Large with the National Post in Canada, a Distinguished Professor at Ryerson University’s Ted Rogers School of Management, and author of ten books.