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Fintech is being used in two ways – to improve the systems and processes used by existing financial services providers, but also to “disrupt”: to create challenging and “disintermediating” alternatives to traditional providers.
Behind the scenes of your payments
Improving existing systems and processes means things like faster payments between bank accounts and new payment methods, such as Apple Pay and Ping It.
Heard of block chains? These are essentially ways of organising transaction data to make it more secure and faster – like a never ending, automated and immediate digital bank ledger, dropping information into individual but linked “blocks”. Bitcoin, the “crypto currency” was built using block chains and now regular banks are considering adopting the technology too.
How about bank APIs? API stands for Application Program Interface. Bank APIs govern how banks store customer and transaction data. Banks are currently under pressure to “open up” their APIs to boost innovation and competition in the banking sector. This would mean other new providers could, with customers’ consent, gain access to your banking data to offer you new financial services (see Apps, below) tailored to the way you save, spend, earn and budget.
UK’s first fintech: the rise of peer-to-peer
UK Trade and Investment (UKTI) estimates that around 18 per cent of the fintech industry is made up of what they call “emergent” disruptors. These are companies that start up and disrupt the existing market using innovative technology.
Such disruptive fintech start-ups have low overheads and can build hi-tech systems that aim to deliver a better service at lower cost for financial services. These might be online “platforms”, or mobile phone apps.
Peer-to-peer (P2P) lending is a “high growth” area of UK fintech, according to UKTI. The biggest and best-known P2P platforms are Zopa, Ratesetter and Funding Circle. The first two enable savers to “lend” to other individuals via the platform, while Funding Circle enables people to lend to businesses.
The platforms aim to minimise risks by credit checking borrowers, but because they do not have the same overheads as banks, the interest rates available via P2P platforms tend to be higher than savers can get from high street banks. The persistence of historically low interest rates has contributed to the growth of the P2P industry, and inspired a large number of platforms to enter the market.
However, people using these platforms do not have the same levels of protection if something goes wrong. Unlike bank accounts they can lose their money as FSCS does not protect them. P2P investors will only receive FSCS cover if the investment goes wrong after they were given bad advice to invest in P2P, not if the investment goes wrong after they made their own decision to invest.
But fintech is spreading rapidly to other areas. “Robo-advisers” are now also taking over the online investment world. Nutmeg, Money on Toast and Moneyfarm are among the early-mover platforms that gather basic information about investors and then design investment portfolios for them based on the criteria given.
The tech is the “robot” receiving the information, then turning it into portfolios. The recommendations are less specific than you would get from an IFA but the aim is to be cheaper and more transparent. Single fees of 1 per cent are normal. The greater transparency and accessibility of your investments comes in the form of things like pie charts and slider tools. As robo-advice develops, new platforms are targeting niches, such as ethical robo-advice.
Managing money has not so far translated well into easy to use apps for your phone. This is partly because providers other than banks have not been able to access meaningful data on customers’ saving and spending that they could turn into a useful tool. If banks open up their APIs (mentioned above) this could change. Moneyfarm, Monese and Curve are among the providers offering apps as an integral part of their service.
Transferring money abroad
Fintech has made it possible to make payments abroad a lot cheaper, benefitting those sending money to family living overseas as well as businesses making cross border payments, reducing fees and also improving exchange rates. Transferwise, Revolut and Currencyfair are all digital platforms – also with apps – that make this easier and cheaper than it used to be.
While the potential of fintech is huge, the days of paying in cheques at your local bank branch are not numbered. While some providers are focusing on a digital audience, others, such as Metro Bank, Handelsbanken and Virgin Money, are expanding branch networks to focus on the gap for the personal touch that so far, fintech has not managed to fill.
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Money Means is a news and information series written by independent financial and consumer journalists and experts. FSCS launched Money Means in 2016 to help give people clear and useful information about personal finance, to increase their understanding and confidence when dealing with money. .