The Fintech (R)evolution Won’t Be Televised, But It Will Be Digitized

We’re on the cusp of a major evolution (or revolution) in the global financial services industry. How we send, receive, store, and invest money may undergo a few radical changes. What we send—that is, money itself—may undergo a complete transformation. This is the dawn of the fintech (financial technology) era, where everything financial—from wallets to banks to physical money itself—may get fully digitized.

So, if everything money-related is “electronified,” how might that change the financial landscape? What emerging risks and opportunities might investors want to keep an eye on?

What Is Fintech?

If you’re not entirely familiar with the forces driving fintech, let’s break it down to get a better look. Fintech—short for “financial technology”—is an emerging hybrid industry that brings together legacy financial services and technological innovation. With this combination, the fintech industry is likely to compete with and disrupt traditional financial services as we once knew them.

According to Michael Fairbourn, education coach at TD Ameritrade, “We’re seeing a convergence of financial companies using tech on one side, and tech companies using financial products on the other.”

It seems pretty simple until you break it down. As Fairbourn put it: “The ‘fin’ side comes down to borrowing and lending—legacy services that have been stationary for a long time. On the other side, ‘tech’ is synonymous with change and disruption.”

He went on to explain that the tech side may have better positioning, marketing, and a very good understanding of social networks, their client base demographics, and the products they’re buying.

So, if tech is the side that’s likely to administer a more drastic dose of disruption, then what might that mean to legacy financial companies sprouting green digital shoots from a brick-and-mortar seedbed? Here’s a rundown of the fintech industry and some of the financial technology companies that may be feeding it.

Banking As a Digital-Only Service

If you can make purchases or deposits on your smartphone, tablet, or any other mobile device, then what’s the point of going to a physical bank, except for withdrawing physical cash? Many “legacy” banks are quickly shifting to provide online banking services. But that’s not the same as online-only banks like Ally Financial (ALLY) and First Internet Bancorp (INBK) that deliberately pushed the curve early on and now hold something of a first-mover advantage.

If online-only banks dominate a sizable share of the market, then banks that are less equipped with the capital or tech resources to take advantage of this fintech evolution—like so many regional banks—could all be disrupted. The idea here is that if a bank can deliver all (or most) of what customers want, without the legacy costs of branches with full staff and building costs, the savings can be passed on to borrowers and depositors.

E-Commerce and E-Payment Systems

Do you need to send money or make a payment quickly? If so, why send someone a digital check or wire funds when you can send money at the speed of a tap with e-payment systems like PayPal (PYPL) or Venmo (owned by PayPal)? If you run an online business, it may be faster and cheaper to use a merchant services aggregator like Square (SQ) than it would to use a credit card or debit processing platform.

E-commerce systems nibble on the corners of the big banks’ cheese plate. Tech companies may be thinking, “Why not just take a good chunk of the cheese?” It seems like a logical progression, which is why some banks may be a bit worried.

Nonbank Financial Services

Last December, the FDIC adopted a rule—effective April 1—that sets the stage for nonbank corporations to file “Industrial Loan Company” charters. This allows nonbanks to begin offering banking services—namely, issuing loans and collecting insured deposits.

Who might be entering this space? SQ and student loan company Nelnet (NNI) had their charters recently approved. As far as the big names are concerned, media reports suggest there’s interest from retail giant Walmart (WMT), tech behemoth Amazon (AMZN), and social media mogul Facebook (FB), for starters. There could be more.

What’s happening here can be viewed in this way: Fintech not only brings new technology to legacy banking space, but it’s also bringing with it a culture of speed, agility, and disruption. These nonbanks may not have decades of experience providing banking services, but will their technologies and cultures of innovation make them fast and agile enough to gobble up legacy banks’ market share?

Cryptocurrency Assets

We’ve all seen the eye-popping price volatility in private cryptocurrencies like bitcoin and ethereum. In February 2021, bitcoin’s market cap surpassed the $1 trillion mark, making it the first crypto to do so. Although cryptocurrencies are speculative assets, we don’t know yet which ones may end up as reliable stores of value or mediums of exchange. But the digital currency space may undergo a massive expansion, from private currencies to central bank digital currencies, aka CBDCs.

China may be the first to launch a national digital currency called DCEP (Digital Currency Electronic Payment), or what media reports and crypto-watchers refer to as the “digital yuan.” Short of trying to predict the future, it’s easy to imagine how the “internationalization” of a digital yuan may have big ramifications on global trade, China’s growing economy, and its prospects for foreign investment.

Along with (or behind) other countries, the United States is still in the “exploratory” phase of developing its own CBDC, or the “digital dollar.” If or when it finally does issue a digital dollar, it may have a significant impact beyond speeding up money transactions. It can arguably affect the banking industry, the status of physical cash, and even the dollar’s competitive standing as the world’s reserve currency. Perhaps falling behind in the race to issuing a national digital currency may also have a significant impact, for better or worse.

Keepers of the Digital Gateways

If the bright lights of tech innovation cast its own shadows, then fintech may bring—along with its potential benefits—its share of risks, accidents, and bad actors. Cybersecurity, a perpetually escalating arena, may be a sustainable need and therefore investment as fintech emerges from the margins to the center of the action. To get a sense of what’s being cooked up on the security front, look to companies developing multi-cloud data storage, AI fraud detection, Secure Access Service Edge (SASE) networks, blockchain systems, and regulatory technologies (regtech).

Investing in the Foundation of Tomorrow’s Fintech Landscape

It’s one thing to invest in a financial asset for the long term. It’s another thing to invest in the very source and infrastructure that may give all financial assets their substance, mobility, and—dare we say it—meaning. To invest in this rapidly evolving industry, you might consider paying attention to all the moving parts that feed into the engines of progress and disruption. In a way, the areas mentioned here only scratch the surface. More changes will likely come to the fintech industry—some yet to be invented—so try not to blink. You might miss something.