Credit card companies are not losing market share in payments to fintechs, but banks are, writes Rolando Grandi in a comment for finews.first.
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
The payment sector is going through deep change. Startups, technology platforms, and neo-banks are looking to re-invent the financial infrastructure. They want to make things more transparent for consumers and provide simple, quicker, and better services. The process has just started. That can be clearly seen in the equity market, where the market capitalization of the fintech sector is about 10 percent of that of the entire sector.
Digitalizing the collection and processing of data are allowing new players to provide payment services far more cost-effectively, as they can use their analytical tools to exactly match client profiles.
«Many banks are fighting ‹technological gaps›»
The traditional banks have not been standing by. Some of them are investing up to 10 percent of their revenue in technology. But they have many problems they need to overcome with their legacy systems. Many banks are fighting ‹technological gaps› and having to cope with aging IT architecture. The reason: many of them still use mainframes from an earlier era and are unwilling to replace them.
Fintechs, on the other hand, have the latest generation of technology available to them - such things as the Cloud, API and Microservices.
«That is why finance is going through disruption»
On the other side of the coin, the banks do have many fundamental advantages. They have licenses and are allowed to store, protect and administer money and assets. Unlike fintechs, they have clients. But their size and extensive heritage will not protect them from their new competitors. That is why finance is going through disruption instead of change.
The hardest job for the new players is to find clients. But the pandemic has helped. It led to the accelerated adoption of new technologies in finance, through the cloud and e-commerce.
«E-wallets have become widespread in the meantime thanks to apps like Wechat and Alipay»
The disruption is very real. For many years now, payments have been made in real-time between two individuals without anyone having to wait for one or two days. Similar innovations are taking enormous steps forward right now. China has been using QR codes for payments for a long time. E-wallets have become widespread in the meantime thanks to apps like Wechat and Alipay. These kinds of trends are making their way to Africa and Latin America. Europe is somewhat on the wayside given that home or remote banking is already very widespread.
«Buy now, pay later» installment plans will be next and they could pressure credit card providers. Companies such as Afterpay in Australia, Affirm in the US, Shopify in Canada, and Klarna in Sweden have already jumped into this niche.
The seller finances the purchase for the client and pays the fintech a commission. That is a revolution in that the service is free for users. Sellers get a great deal of information on clients and they can use their platform to get an exact picture of a client's creditworthiness. They can determine the level of risk that they want to take and make a decision as to whether they want to finance the client's purchase or not.
«Instant credit is now the newest innovation in payments»
Mobile payment pioneers such as Paypal, a Fortune 500 company, or Block (formerly known as Square), which already counts two million users, have long been giant corporations. Instant credit is now the newest innovation in payments.
It won't only be credit card companies that lose market share to fintech but banks will as well. It will be consumers that shift to new players in retail banking and they won't be giving up their credit cards.
At the end of the day, governments will be determining the ultimate tempo of the changes underway. But given that fintech companies only comprise 10 percent of the finance sector, it will take a long time until authorities start to slow their development.
Rolando Grandi has been a fund manager at La Financière de l'Échiquier (LFDE) since 2017, where he focuses on artificial intelligence (AI). The Bolivian likes to describe himself as a «geek» and combines several years of experience as a financial analyst with excellent knowledge of the tech and AI industries. He is a graduate of the IAE School of Management Lyon and started his career at Roche-Brune AM as an international equity analyst.
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