Rapid advances in technology, from cryptography to artificial intelligence, are transforming the competitive landscape in financial services. According to the IMF, fintech firms might be able to provide better services and respond to customer needs for security and privacy.
With the development of financial technology, the differentiation between various spheres of finance is getting blurred.
Cross-border payments have traditionally been considered as different from domestic banking. Firms like Western Union and MoneyGram have an established presence in the remittances business.
Cross-border payments using traditional channels are costly and cumbersome. With cryptocurrencies like Bitcoin and Ethereum gaining traction, the boundaries between domestic and cross-border payments have been blurred.
There are a number of Blockchain-based remittance companies like Bitpesa, Bitspark and Everex. The potential for cost reduction in cross-border payments is immense.
Established market players in the finance sector have a large customer base and manage to keep costs low due to economies of scale.
Fintech has shown that by disrupting the business model, it is possible to lower the barriers to entry and challenge established market players.
However, there may be regulatory barriers (including stringent requirements on licensing) which may impede the ability of fintech companies to compete with incumbents.
Do you need to trust your bank?
The need to trust traditional financial intermediaries like the bank has decreased, with advances in fintech.
While Blockchain technology may remove the need to trust a bank to accurately record your account balance and make payments on your behalf, you still need to trust the network.
As shown during the Ethereum hard fork, reversal of transactions can occur if the majority of users in a network agree to do so.
In the traditional financial system, legislation in certain jurisdictions prohibits the reversal of payments that have been deemed to be completed by the payment systems’ rules.
Of course, most payments, including credit card payments, can be reversed if there is an allegation of fraud.
While technology has changed the dynamics of the financial services sector, only time will tell whether the changes will be disruptive or if the industry will slowly adapt.
Technology will provide regulators with both opportunities and challenges, and they will play a major role in how the fintech sector evolves.
International agencies, like the IMF, would also have an important part to play given the blurring of international boundaries in the financial services sector.