Disruptive innovation is occurring throughout the financial industry. Young FinTech firms such as SoFi and Self Lender are changing the way consumers spend, invest, borrow, make payments and use ancillary financial services, disrupting traditional financial services across the globe. While many of these firms are seen as outright competitors to banks and credit unions, others work with banks and financial services companies to deliver these capabilities in new ways to consumers and corporate customers.
The Startups Leading the Disruptive Innovation
Forbes estimates that there are anywhere between 5,000 and 6,000 FinTech companies worldwide, and according to Citi Global Perspectives & Solutions (GPS), investors poured $19 billion into FinTech firms in 2015, up from $1.8 billion in 2010. More money is expected to be invested in the next few years as customers seek easier, more efficient ways to handle their financial services needs.
Here are just two of the startup firms that could change the way people manage their financial services:
- Traity uses social media profiles to develop credit scores, providing consumers and lenders with an alternative to the traditional credit scores provided by Experian, TransUnion and Equifax. Instead of relying on the usual measures of creditworthiness such as credit card and mortgage payments, Traity uses posts from Facebook, LinkedIn and other social media sites, as well as user profiles from sites like eBay and Airbnb, to build a credit reputation/score for the consumer. This provides non-traditional lenders such as Affirm and Kabbage with a different way to evaluate a person’s credit, and offers more options for young people who may not have the traditional jobs and resources typically required to build credit.
- Trov, an on-demand insurance platform that’s coming to the U.S. in 2017, enables people to create customized insurance policies so they can design coverage for specific items rather than buying more comprehensive — and more expensive — policies. All they have to do is use their smartphones to scan the things they want to cover.
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Other FinTech Trends Changing the Industry
Peer-to-peer insurance is an area of disruptive innovation that eliminates many of the intermediaries and their related costs from the insurance process while also helping to reduce fraud. Companies such as Lemonade rely on smartphones for applications, eliminating expensive paper processes.
Due to growing computer power and neural network advancements, the finance industry is also seeing a rise in robo-advisors, which provide consumers with financial planning advice that had previously been limited to human advisors and relatively simplistic financial planning tools.
Citi GPS says that although banks still have the competitive edge over disruptive FinTech companies, their hold on the market isn’t expected to endure for long. Authors at Citi GPS recommend that banks reduce and modernize their branch networks, offer competitive digital products and develop a targeted channel strategy to remain competitive. With new FinTech startups emerging weekly, the industry disruption is expected to continue well into the next decade.
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