An Overview of Financial Technology Infrastructure Transformation Trends and Market Landscape in One Article

2020/2/22

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Will traditional fintech applications lead the way in moving their digital stack down, or will cryptocurrency exchanges like Binance build the bridge first?

By Chris McCann, Managing Partner at venture capital fund Proof of Capital
Translated by: Perry Wang

Fintech startups target all core financial applications, including banking ($70 trillion), wealth management ($75 trillion), capital markets ($74 trillion), lending ($80 trillion), real estate ($80 trillion), insurance ($50 trillion), payments ($20 trillion), and remittances ($800 billion).

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Although these financial activities span different sectors, they are all interconnected and mostly rely on traditional financial institutions such as JPMorgan Chase, Wells Fargo, HSBC, BNP Paribas, Mitsubishi UFJ Financial Group (MUFG), Bank of America, Bank of China, ICBC, Citi, and more to be completed.

Many fintech startups are created by technologists who represent a very new customer base for traditional banks, as they are changing the demands of the underlying financial infrastructure.

Before delving into how the ecosystem of infrastructure has evolved, I would like to first discuss the main trends driving this transformation.

• Continuously expanding global customer base
• Embedded Fintech
• Disaggregation of financial institutions
• Developers becoming end customers

Financial services companies historically catered to a limited customer base due to geographical barriers. Traditional banks initially established offices locally, in cities, regions, states, and nationally, collaborating with international correspondent banks to facilitate fund transfers across jurisdictions.

The primary goal of bank creation was not to serve international clients. Under the existing system, sending international payments incurred significant compliance costs. The average cost of international remittances between retail consumers reached 7%.

In contrast, digital commerce platforms had to address international clients from day one. For example:

• Apple — with 1.4 billion active Apple device users across continents.
• Airbnb — 650,000 hosts, 150 million guests, 2 million orders daily, spanning 191 countries.
• Shopify — 600,000 merchants across 175 countries, generating a total GMV of $15 billion in 2019.
• Uber — 3 million drivers and 75 million riders in 80 countries, GMV reaching $40 billion in 2019.
• Binance — 15 million users in 180 countries, platform trading volume reaching $1 trillion in 18 months, with accumulated profits of $1 billion.

Today's financial infrastructure platforms must be equipped from day one to handle customer groups across all jurisdictions, all value exchanges, and all types of use cases (producers, distributors, consumers).

The financial sector and fintech have traditionally been seen as vertical industries serving specific use cases (banking, lending, trading, etc.). However, what we see today is the rise of " Embedded Fintech."

Financial functionalities are no longer standalone applications but are integrated into all consumer and business applications that people are already using. For example:

• Uber — introduced Uber money allowing drivers to collect earnings in real-time, issued credit/debit cards for spending.
• Grab — created its own digital wallet for storing and spending value (similar to WeChat Pay).
• Google — now offers checking accounts through partnerships with Citi and Stanford Federal Credit Union.
• Facebook — preparing to launch Libra, a more ambitious move to develop digital currency.
• WeChat (Tencent-owned) — with 1 billion users, handles $1 billion in daily payment transactions through WeChat Pay.

Financial enterprises used to offer comprehensive services to a broad customer base. For instance, Wells Fargo Bank provided all services to the following sectors:

• Consumers — checking accounts, savings accounts, debit cards, credit cards, foreign exchange, remittances, and payments.
• Small and Medium Enterprises — business checks and savings, debit and credit cards, business credit loans, loans, merchant services, credit card processing, and POS systems.
• Corporates — commercial checks, financing, real estate, employee benefits, institutional investments, investment banking, securities, and wealth management.

By Tom Loverro: https://tomloverro.com/post/102797126721/banking-is-under-attack-heres-a-screenshot-of

With fintech firms gaining more traction, they primarily target narrow verticals and customer segments. The image above illustrates how each fintech company is attacking a specific product segment provided by Wells Fargo Bank.

Traditional financial firms are beginning to feel the impact of large competitors and fintech startups in various niche markets and product areas.

Historically, financial institutions were set up to serve established customer groups (retail businesses) or business owners (small and medium enterprises). However, a new type of user has emerged — developers who need access to the financial infrastructure used by these banks.

Developers not only seek access to the data of financial institutions, known as " open banking," but more importantly, they want access to the underlying functions provided by banks.

Prior to the emergence of fintech platforms, if a developer wanted to create a new fintech company, it typically took over two years to establish a partnership with a bank before launching operations. Now, developers are leveraging fintech platforms (such as SynapseFi, Sila, etc.) to kickstart new fintech applications in possibly just a few hours. This significantly reduces investment and accelerates the proliferation of fintech applications in the market.

My prediction is that this trend will continue to evolve further in the future, with financial infrastructure platforms playing a role in a range of financial networks, including banks, financial institutions, and the growing number of digital wallets. These developer platforms will abstract the complex operations spanning multiple financial actors, enabling various applications to embed fintech services in their products (both fintech and non-fintech applications).

Most people typically believe that fintech applications are built on existing bank systems.

However, as issues at this infrastructure layer are resolved, a new runway for the banking industry, still in its infancy, will emerge, with digital assets being the most prominent. This includes Bitcoin, ETH, and various stablecoins (USDT, USDC, etc.).

Given that digital assets are inherently programmable, many first-order problems have been resolved since their inception. Digital assets are stored on a common data layer (blockchain), have a shared interface (UXTO or ERC20 interface), and are built on interoperable protocols (assets can be stored in any digital wallet).

Here's a big question: Will the first wave of digital asset platforms (Coinbase/Binance) be the first to bridge these gaps, or will traditional fintech applications be the first to move their digital stack downward? The answer remains unclear.

This intersection is quite intriguing, and we are closely monitoring it.

This article is authorized for republication by ChainNews, article source: ChainNews (ID: chainnewscom)

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