The Future of Financial Services: What Every Company Should Know

The Future of Financial Services in Every Company

• Every company should consider leveraging financial services to better serve, retain, and attract customers.

• In the near future, almost every company will become a financial services company and generate a significant portion of revenue from it.

• The transformation in financial services infrastructure will lead to fundamental changes in banking for startups, existing financial institutions, and even companies unrelated to financial services.

• The current state of the financial services industry is inadequate, with a low level of trust from customers, especially among millennials and Gen Z.

• Challenges faced in the industry include outdated institutions, high IT maintenance costs, and a lack of innovation.

• Despite the obstacles, there is optimism for the future, similar to the challenges faced by the software industry in the past.

The Future of Financial Services in Every Company

The Revolution of Infrastructure as a Service in Financial Services

• The advancement of technology has significantly reduced the barriers to entry for businesses in the financial services sector.

• Companies like Airbnb, Uber, Lyft, Apple, Shopify, and Mindbody are venturing into financial services, leveraging their existing customer base and infrastructure.

• The shift towards offering financial services is not limited to consumer-facing companies, as even B2B companies like Shopify and Mindbody are generating substantial revenue from financial services.

• The complexity of the banking stack has historically been a major barrier to entry for new financial services players due to the highly regulated nature of the industry.

• The notion of 'as a service' infrastructure is now transforming the banking industry, making it more accessible for new entrants to offer financial services.

• The introduction of infrastructure as a service in financial services is unleashing a wave of innovation, with both startups and established companies exploring new financial service offerings.

The Revolution of Infrastructure as a Service in Financial Services

Challenges in Financial Technology

• The process of building financial technology products requires numerous partnerships, database systems, and integration with payment systems.

• Compliance with multiple regulatory agencies and dealing with fraud adds further complexity and extends the time required for development.

• Developing infrastructure to access and utilize data from multiple banks and financial institutions poses a significant challenge.

• Companies like Plaid have emerged to simplify the process by providing integration and data translation as a service, enabling faster development of financial applications.

• Innovations in financial technology, such as early paycheck access and streamlined mortgage applications, have been accelerated by companies like Plaid.

• The antiquated infrastructure of the financial industry, including student loan servicing interfaces dating back to the 1970s, is expected to see significant improvements in the near future.

• Building checking accounts and debit card products involves a complex web of partnerships, including ATM networks and remote check deposit capabilities.

• Companies like Synapse are simplifying this process by providing solutions for the integration of various systems built in the 1960s.

Challenges in Financial Technology

The Importance of Complying with Financial Regulations

• Compliance with regulations is crucial for businesses, particularly in the financial services industry. Failure to comply can result in hefty fines, or even imprisonment in the case of financial services.

• The extensive monitoring requirements for anti-money laundering (AML) and sanctions lists create challenges for banks, leading to many false positives and a high number of manual reviews. This results in a frustrating customer experience and significant operational costs.

• Technology, such as that offered by Comply Advantage, streamlines the compliance process by handling multiple integrations and providing granular risk controls. This not only reduces the burden on banks but also enhances customer experience, lowers costs, and increases the success rate of detecting illicit activities.

• The constant challenge for banks is staying ahead of money launderers and fraudsters. As banks improve their anti-money laundering measures, criminals adapt and find weaker points in the system to exploit. Similarly, fraudsters have evolved beyond stolen identities to creating synthetic identities, posing a new threat.

• Addressing these challenges requires a combination of deep customer understanding, innovative product ideas, and effective distribution strategies. Companies like Propel, with insights derived from personal experiences, have been successful in developing tailored services for the market they understand intimately.

The Importance of Complying with Financial Regulations

The Rise of Synthetic Identity Fraud

• Synthetic identity fraud is on the rise, with fraudsters creating fake identities by linking random nine-digit numbers to social security numbers.

• These synthetic identities are used to apply for loans, and over time, they build credit profiles and borrow more money.

• Companies like Centrelink provide services to detect and prevent synthetic identity fraud by analyzing the borrowing patterns of fake identities compared to real individuals.

• The evolution of financial infrastructure companies is reshaping the global financial services industry, creating opportunities for startups and established financial institutions.

• The disruption in financial services is not limited to the US, but presents a global opportunity, especially in regions with unique regulatory and payment system challenges such as Mexico.

• The rise of FinTech companies and new infrastructure providers offers opportunities for existing financial institutions to replace legacy systems, reduce maintenance costs, and launch new products through partnerships.

• Businesses across various industries, including transportation (e.g., Uber, Lyft) and e-commerce (e.g., Shopify), can leverage financial services to enhance customer retention and drive higher margins.

• The ultimate beneficiaries of this financial revolution are consumers, who will have access to better and more affordable financial services, potentially even from their favorite brands.

The Rise of Synthetic Identity Fraud

Conclusion:

The evolution of financial services is paving the way for businesses to enhance customer retention, drive higher margins, and offer better and more affordable financial services. Every company has the opportunity to benefit from this revolution and better serve their customer base.