There's hardly a week that goes by without a fresh perspective on how millennials are changing -- if not disrupting -- a legacy industry. From where I sit -- as founder of a fintech company that has a large and diverse following (not just millennials) -- there are at least three reasons for this.
First, as a recent study by Pew Research reported, millennials are now America's largest generation, outnumbering baby boomers who have long been the priority of marketers across all consumer sectors.
Second, millennials are the first generation that truly "grew up digital," forcing businesses to rethink the user experience that defines their products and services.
But third, and perhaps most important, millennials are not alone in demanding a better and more digitally-informed experience from the businesses that serve them. Many people older and younger -- watch out for Generation Z -- want change. There are new norms that most consumers expect, and woe to industry leaders who cannot adjust to those norms.
Within fintech there has in fact been progress in the area of innovation, particularly with some of the bigger banks. By and large, however, the industry has been lagging in several areas that inhibit consumption of consumer financial products and services in the digital age.
Older consumers lost immense trust in traditional banking after the 2008 financial crisis, and for millennials, the financial crisis struck just as they were coming of age in their financial life. As Americans rebuild their confidence in traditional financial institutions, these institutions continue to demonstrate risks every day that chip away at that trust. Much of this is due to the existing money system that is inherently expensive, fraud-prone, and centralized.
I'll look at some of the inefficiencies in the system (see next section), and their impact on costs. But on the topic of trust, the financial industry can benefit from the innovation of customer-facing data that has already positively transformed the consumer experience in other industries (travel, hospitality, retail/e-commerce). Within fintech, some verticals like insurance are benefitting from the emergence of insurance company rating and reputation data. In my particular fintech vertical - global bill payments - there is an opportunity to help consumer aggregate and analyze all of their payment data.
The name of the game here is transparency -- the bedrock of trust -- and it represents a new data-driven frontier for financial products and services.
So now let's look at inefficiencies in consumer financial services. For example, processing a credit card payment at a clothing store is costly as it requires the transaction to go from the merchant to an acquiring bank (the credit card processor), to the network (e.g., Visa), to the issuing bank (the bank logo on your card), and finally all the way back with a confirmation to the clothing store. There are inherent and inevitable complications when a payment requires so many steps between so many different entities. Then there is ACH, which is the primary way money moves electronically, with more than $40 trillion moved in nearly 23 billion electronic financial transactions annually. These are bank-to-bank transfers. It's a system that's much cheaper than credit cards, but it is often much slower, and more prone to error.
What's the solution? Like other industries that have been highly fragmented, what the consumer financial services industry needs to do is decide on simpler and more streamlined industry standards for the flow of money. The simplicity would again help with user experience. And the streamlining could help remove entire layers of friction that have slowed things down between senders and receivers.
The name of the game here is cost-efficiency, which would accrue to the brand of the financial services provider.
The regulatory landscape
But there is also friction that affects other players in the ecosystem: the more than 20,000 fintech startups that are ready to help change the status quo. The problem here is the byzantine regulatory landscape that startups must navigate. Fintech firms need to comply with regulations, yet it is nearly impossible to decipher which financial activities require licenses. Existing policies have cryptic and opaque definitions of laws that vary state-to-state and at the federal level. Between the federal government and 50 states, startups are required to abide by 51 different sets of regulations just to operate in one country. Being registered as a money transmitter is a two-year ordeal and will set startups back about $3 million. Naturally, most startups try to avoid it.
What's the solution? Again, innovators can take a cue from other industries -- for example, security technology, which has spawned firms that help businesses understand how to effectively manage the ever-changing landscape of governance, risk management, and compliance.
The name of the game here is agility, without which innovation cannot occur. But in order for this to happen in the financial industry, there would need to be collaboration between regulators, industry incumbents, and the new-guard of technology startups to address some of the more onerous regulations and potential solutions. In the end, the challenge to keep up with millennials and others who are demanding change is a shared responsibility, and a shared opportunity. No one can afford to be left behind.