Technology has killed a lot of things.
On August 1st in 1981, MTV launched, and the face of music changed forever. And again, in the early nineties and noughties when the internet gave rise to iTunes and Amazon. You don’t see people carrying portable CD players or waiting in line to buy the latest album release.
And that’s just the music industry. Algorithms, robots, automation, machine learning (the list goes on) are all technologies impacting our everyday lives and traditional industries, particularly the financial sector.
The majority of financial services are commodities
Take credit cards — only effectively differentiated on two fronts: eligibility and price. Brand, UX, introductory offers etc., rewards — all icing on the credit cake, designed to befuddle consumers into switching frequently and making long-term financial decisions on the basis of short-term incentives.
This focus on branding in financial services is a hangover from the days where there was an element of risk assessment involved in choosing your deposit bank. The most secure, the most trustworthy, the least likely to get robbed etc. Technology and regulation have largely rendered that conversation irrelevant: your money is unlikely to be any safer in one institution over another, yet irrational financial decisions on the basis of brand continue to be made by consumers all over the world.
Let’s consider for a moment the idea of a single consumer’s financial life as an optimisation problem. On the one hand we have our given consumer’s financial state now, and from this a projection of their future— transactional data from current/checking accounts, credit history from various reference agencies, savings and extrapolated future earnings potential, probability of material life events in the future, the list goes on…
On the other hand we have the market for consumer financial services — rates are published universally across all verticals, changes are predictable, eligibility criteria are largely known, short term incentives can be arbitraged etc.
Would you trust a robot?
What we are left with is a complex piece of arithmetic, but arithmetic nonetheless. There is an optimal constellation of financial products for every consumer. This arithmetic, let’s call it our ‘artificially-intelligent financial adviser’ (AIFA), is not sensitive to advertising and can do the sums on all the incentives to see through to their real value (or lack of). Very few consumers relish getting into the weeds with even the most basic arrangement of their finances — what consumer would turn away from knowing that their financial life is a solved problem? That they can rest easy knowing their finances are in literally the best state that they can be in?
In truth, probably quite a few! As a society, our trust issues with machines still have some distance to run, but as has been discussed elsewhere extensively, these reservations tend to be quickly undermined by the powers of convenience and distraction. Whether it’s tapping your smartphone and minutes later jumping into a stranger’s car, or booking a bed to sleep on, in a city you’ve never visited via an app.
So what does this mean for the future of Fintech (and humans)?
If soon all of our respective AIFAs will be both managing and shopping for products on our behalf, what will be left for the credit card and loans companies of tomorrow to compete on?
The obvious first answer is price. A hyper-efficient race to the bottom ensues — marketing budgets are reduced to zero and these savings are passed directly to the consumer in the form of lower rates. Now operational efficiency is the competitive battleground between lenders of all stripes, who can create the largest OpEx savings to pass on to consumers?
A possible second is eligibility — the quality of credit scoring carried out by these products becomes the second lever they can use to compete. This becomes interesting as we now have a second raft of corporate AIs effectively mining the same consumer financial data to try and optimise pricing and criteria, minimising bad debt rates to allow prices to remain low and attractive to our perfectly-rational AIFAs.
So we’re converging to an arms race on pattern inference between competing AIs all optimising towards the ultimate lowest cost for consumers — and the best bit is, consumers are completely unaware it is happening. They continue to live their lives safe in the knowledge that information-symmetrical capitalism with zero switching costs is holding them in a never-ending suspended state of financial grace. Fintech becomes the ultimate expression of capitalism helping consumers to live happier lives and the world promptly and completely forgets it exists.
Tech is key
It’s an exciting time to sit at the intersection of technology and finance. With the likes of Funding Circle in marketplace lending, TransferWise in money transfer, and PayPal in payment processing, it’s time to bring mortgages into the 21st century.
Algorithms can access and analyse every mortgage on the market from over 100 lenders in a matter of seconds, to find exactly the right one for you. Often cheaper than the human alternative, AIFAs can enable financial advice to be more widely available.
Another advantage of an automated solution, is its appeal to a younger generation - ‘millennials’ who grew up with the internet and smartphones and value the transparency of automated financial platforms, that seek to replace traditional advisors. And arguably are more reliable and efficient.
A new breed of digital mortgage companies is emerging, using automation and machine learning to do jobs in minutes and seconds that previously took hours, days or weeks.
The mortgage market has held out longer than most due to the complexity of the product and the number of stakeholders, but it can and is changing. Re-mortgaging could become commonplace, meaning the most competitive and innovative businesses in the market have much to gain.
Now that change is upon us, I have no doubt more innovation will follow. We are entering a new, technology-enabled, phase of home buying, one that is going to have to do a far better job for consumers.
Daniel founded habito, the first digital mortgage broker in 2015. He saw the opportunity to transform the mortgage market after a frustrating and protracted experience getting his own mortgage and decided to use technology to create a better way.