Fintech is reducing employee and material costs, and ablation intermediaries to make lean and efficient financial services.
The financial services industry features a long history of using IT for innovations. within the 1950s, the Diners’ Club and American Express then a mail-delivery company brought consumers the primary credit cards to ease the burden of carrying cash. Within the late 1960s, banks introduced self-service ATMs to enhance customer convenience and make their tellers more efficient. Within the 1970s, stock exchanges began to exchange manual floor-trading with electronic stock-trading to form trading faster and cheaper. Within the 1980s, banks began experiments with online banking, using computers and networks to permit consumers to form bank transactions whenever they wanted. Within the 1990s, banks began embracing Internet banking, and within the 2000s, most adopted mobile banking.
Because of the choosing of IT, labor productivity the rise in output produced by workers given a unit of effort has increased across the financial services sector. For instance, U.S. commercial banking labor productivity grew by 153% from 1987 to 2015, twice as fast as labor productivity within the overall economy. It’s allowed firms to select off the “low-hanging fruit” of relatively easy-to-improve performances, like automating regular tasks. For instance, credit unions automate their back-end processes, like data entry, saving them hundreds of hours a month in routine IT tasks.
Additionally, IT enables businesses to fundamentally reengineer processes, including organizational changes. For instance, electronic and mobile banking gave banks a replacement thanks to communicating with their customers, reducing the necessity for bank branches and changing the role of tellers. Similarly, self-service options, like automated ATMs, have helped banks and financial-service providers reduce their costs and increase their productivity.
But the subsequent wave of IT-based financial-services productivity will depend upon significantly different business and repair models, with technology significantly reducing the role of the intermediary. By streamlining infrastructure, fintech companies can reduce the number of intermediaries and, by extension, the prices of providing financial services. For instance, peer-to-peer lending platforms connect lenders directly with borrowers, removing traditional financial institutions from the method altogether and offering lenders higher rates and borrowers greater flexibility in their loans.
This chance extends beyond lending, as new fintech companies take over payment processes historically controlled by banks. And within the world of private finance, companies like Wealthfront and Betterment are using IT to bypass traditional investment advisers and help consumers plan their investments with minimal fees. By ablation intermediaries, fintech firms are ready to deliver cost savings to consumers.
In addition to reducing intermediation costs, fintech will still enhance productivity for both the financial services sector and its customers. Fintech options are reducing both material and employee costs for the industry. For instance, fintech enables workers within the financial services sector to be more efficient, reducing the burden of employee costs on businesses.
One report estimated that up to 30% of employees within the banking system might be replaced with technology by 2025. In the same way, businesses are digitizing their services to chop first-order material costs. For instance, the invoice financial company Taulia offers a service called “dynamic discounting,” which uses e-invoicing to permit a supplier to choose initial payment reciprocally for a reduction. This process not only ensures greater business efficiencies for Taulia’s internal operations and its customers but could reduce material waste by an estimated 1.5 million pounds of CO2 and 100,000 pounds of physical waste between 2015 and 2018.
Fintech also creates markets that allocate resources more efficiently. For instance, online peer-to-peer lending firms create marketplaces where buyers connect directly with sellers, helping to raised match supply with demand.
Each category of fintech features a varying degree of potential productivity gains, where fintech more likely applications to scale back intermediation costs offer significant gains and people that simply enhance financial services like by making financial services more efficient or convenient, offer incremental productivity gains. For instance, certain innovations in payment, like mobile wallets, enhance users’ experience but might not offer an equivalent disruptive productivity gain as peer-to-peer lending, which reduces the necessity for traditional intermediaries.