Legacy Systems and Legacy Thinking: Fintech and the reinvention of financial services
Posted on the 23rd September 2016 by Amanda Nunn in SME blog
Until relatively recently, it is quite possible that many of you hadn’t ever heard the term Fintech. But, it’s broad sector with a long history. It was British banks that invented many of the current account features that we now just take for granted.
In 1778: Royal Bank of Scotland invented the overdraft
18th Century: Pre-printed cheques appeared together with a clearing system
The 50s: Credit card to ease the burden of carrying cash.
The 60s: ATMs to replace tellers and branches.
The 70s: Electronic stock trading began on exchange trading floors.
The 80s: Rise of bank mainframe computers and more sophisticated date and record keeping systems.
The 90s: The internet and e-commerce business models flourished.
Despite this, the fundamental business model of a bank remains much the same today as it would have been some 400 years ago. That is to offer lower interest rate to the depositor and higher interest rate to the borrower. The bank then makes its money from the interest rate differential.
So now, in 2016, with the widescale adoption of mobile wallets, payment apps and robo-advisors, why is it that Fintech is no longer a byword for the enhancements to banking services, but a successful, standalone sector, that threatens to disintermediate the banks entirely?
Let’s take ourselves back a little.
Between 2004 and 2006 US interest rates rose from 1% to 5.35%, triggering a sever slowdown in the US housing market. A few years later on the 9th August 2007, BNP Paribas announced that they had been forced to freeze three funds as the fears of greater losses from US sub-prime continued to weigh on global credit markets.
The news sent shares in the bank tumbling by more than 3pc in early trading.
As a result, BNP Paribas stopped investors from taking money out of the funds or putting more money in and suspended calculations of how much the funds are worth.
Trust in the banking system evaporated almost overnight.
Everyone had assumed that governments would never allow a bank to fail but on the 15th September 2008, the US government allowed the investment bank, Lehman Brothers to go bankrupt.
The public no longer trusted the financial institutions and the banks came under increasing pressure to cut costs in order to stay within the tougher capital requirements.
This created the perfect storm for a financial revolution.
In 2014 Money Mover was founded by Hamish Anderson.
What’s unique about Money Mover is that we approach global payments from the perspective of our customers, and asked SMEs what they need from such a service and how we can make their lives easier. It’s not just about reducing their costs – though we normally reduce total fees by up to 90%. What motivates us is using technology to improve transparency and the user experience.
Our platform understands the way that SMEs work. Our customers are generally ambitious and entrepreneurial businesses which are becoming increasingly international in their outlook and activities.
Our typical customer sells or receives grants from abroad, or perhaps they have supplier relationships outside the UK. The majority use us to make payments to third-parties, but an increasing number use us to move funds between their currency bank accounts, which is almost always cheaper than using their bank.
Our revenue model is simple: we allow our customers to execute their payments and transfers at the mid-market exchange rate, and then apply a single, all-inclusive fee. Our fee is fully transparent and is easy to understand. It’s also consistent. We don’t do teaser rates, and won’t put up your fees when you’re not looking!
Despite the learnings that many of the banks took away from the financial crisis, a desire to overcharge and under share is still entrenched in their business model.
Last year we commissioned consultancy Accourt to look at the fees charged by six of the UK’s biggest banks, and specifically looked at the margin that is added to the exchange rate received from the money markets, known as the “spread”, which is built into the price of the deal.
According to the research, 96% of the revenue generated for a bank on these kinds of transactions comes from the spread, which is then built in to the overall cost of the transfer, with so-called “fixed fees” then charged on top.
The report highlighted the ongoing lack of transparency in the way that these deals are priced, despite attempts by the UK Government to ensure a fair and competitive banking industry.
The average transaction cost charged to a small business customer on a transfer of £75,000 within the EU – where 50pc of UK small firms’ international trade is generated - is 2.43pc, or £1,822, the report claimed. Of this cost, £1,807 is attributed to the spread.
So, what does the future look like?
For businesses like Money Mover to stay ahead of the curve we will need to stay current, responsive and agile. Our ability to compete will be dependent on our ability to retain a transparent dialogue with our customers.
Unburdened by such heavy regulation, legacy IT systems and branch networks, the fintech players will continue to cut costs and improve the quality of service.
Banks, who 18 months ago, viewed us and others in the sector as an entertaining annoyance but of no real threat, are suddenly creating fintech-focussed venture capital funds, asking staff to mentor start-ups in fintech incubators and forming research teams to understand every emerging fintech business models.
Partnering with these businesses provides the large banks with a broader range and lower cost access to innovation, greater agility, potential investments opportunities and above all, a strategic opportunities for a future where collaboration will be key.
So for now, fintech disrupters and banks remain frenemies. And who knows where that will lead.
Other articles you might be interested in
- What’s keeping most small business owners up at night
- An Interview with our Intern, Alex Parsonson
- The challenges and opportunities presented by Brexit