How Financial Institutions Are Attracting a New Generation of Super Consumers
By Beni Hakak, CEO of LiquidApps
Ever since the world’s first continuously operating bank was established in Renaissance Italy, the financial sector has enjoyed its role as the sole provider of financial service and the only conduit connecting consumers with markets. For the last few decades, money would travel in a closed loop between banks, insurance companies, brokerages, clearing houses, and other established financial institutions.
That all started to break when Paypal emerged, allowing its customers to buy off eBay before expanding to a more comprehensive suite of financial services and minting a top tier of entrepreneurs in the process.
In the following decades, the word "fintech" would become synonymous with the slew of startups chipping away at the dominance of financial institutions. Whether Stripe for payments, Robinhood for investment, or Lemonade for insurance, individual functions once offered solely by the banks have morphed into multi-billion dollar businesses standing on their own. Instead of saving, trading and borrowing from traditional institutions, a growing movement of customers are instead channeling their funds into a parallel ecosystem of apps.
These super consumers have taken to fintech not as a replacement for financial institutions, but as a supplement. They are less likely to accept unnecessary fees and long settlement times as "the cost of doing business." As a digitally native generation, super consumers want their financial experience to incorporate frictionless services, fluid interfaces, and customer-centric brands.
It isn’t just fintech—tech companies across other verticals are also making a strong push into financial services. Uber rolled out Uber money last year with the aim of equipping their drivers with key financial services in-app. Companies like Plaid, recently acquired by Visa for $5.3 billion, and startups like Unit Finance have ushered in the era of fintech-as-a-service by integrating financial services into existing platforms.
The best financial institutions are leveraging cutting-edge technology to not only retain their existing customers, but unlock entirely new value chains. By embracing a customer-first culture, transforming their infrastructures, and innovating at the intersections of tech and finance, institutions can secure their positions as the top choices for super consumers.
Banks and financial institutions can ride the fintech wave with blockchain technology
Initially conceived as a peer-to-peer system for sending and receiving currency, blockchain technology has evolved to encompass a wider variety of financial functions. The movement to recreate financial services on the blockchain has given rise to a vibrant ecosystem known as “Open Finance,” "Decentralized Finance," or "DeFi," for short. In the last two months, Open Finance has exploded, tripling the value of deposits locked across several lending, savings, investments, and derivatives platforms.
While the Open Finance sector largely consists of traditional services with a blockchain twist, it has also spawned an entirely new class of financial applications, such as automated market makers and liquidity pools. These intelligent agents provide liquidity in a variety of markets and use algorithmic pricing to dynamically adjust to prevailing market conditions. Just as algorithmic trading opened up novel opportunities for traders, quants, and financial institutions, so too the growth of automated market makers is introducing new ways to generate yield.
In their quest to modernize their systems and regain their competitive advantage, institutions could look to the tremendous talent and innovation evolving in the Open Finance sector.
Moreover, these platforms are built on public networks which serve as ideal "testing grounds" for the technology. Some of the use-cases that have extended beyond the test tubes and into primetime usage include:
Micro-Payments: Everytime a credit card is swiped, no matter the amount spent, the merchant’s bank has to pay an interchange fee to the issuing bank in order to cover the costs associated with processing the payment. This makes small transactions unfeasible and effectively shuts institutions off from the ‘long-tail’ of finance. Integrating distributed ledger technology (DLT) into payment rails allows for the creation of a market with zero transaction fees and minimal time delays.
International and cross-banks money transfers: In an era of instant communication, the lag involved in international money transfer seems like a relic of an archaic past. Even within countries, transfers between banks usually take up to two business days due to the incompatibility of the banks’ systems. The process becomes even more resource-draining as the number of banks involved in a transaction increases. Visa has set out to conquer these limitations by reducing the latency and costs of global bank-to-bank transfers with its B2B Connect payment network. The B2B Connect network is capable of settling cross-border payments in a matter of minutes, as opposed to days, using DLT for clearing and settlement.
Peer-to-Peer lending: P2P lending platforms allow borrowers to crowdsource capital by tapping into the community of lenders instead of going to the bank for a loan. Yet P2P lending is not limited to currencies only. The Tel-Aviv Stock Exchange recently launched a lending platform for securities that harnesses the advantages of DLT, such as direct peer-to-peer transactions and immutability.
What was once the domain of a select few investors is drawing in a new generation of financially-savvy, retail-orientated super consumers, especially with recent changes to the accredited investor definition. These super consumers are actively involved in trading assets, taking out loans, issuing and settling financial products and doing anything else they can to increase their excess returns.
Institutions looking to capitalize on this explosion in financial innovation could be well served by incorporating peer-to-peer systems in their business models, all fully KYC’d in accordance to the amount in play. Peer-to-peer finance and the disintermediation it brings could contain the secret formula to onboarding super users with less friction and a more seamless user experience, allowing for scale. The technology has ripened and is ready for primetime, especially for those who understand which technology to choose or with whom to consult.
About the author
Beni Hakak is the CEO and co-founder of LiquidApps. He was formerly the director of operations at Bancor and a strategic consultant manager at Ernst & Young. Prior to that, Beni had served in an elite technology unit of the Israeli Defense Forces and graduated from Israel’s top technology institute, Technion, in industrial engineering and management. Beni discovered blockchain technology four years ago and has been creating, advising and working for companies in the space ever since.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.