‘Banking industry is ripe for disruption,’ states Edgar, Dunn & Company

Founded in 1978, Edgar, Dunn & Company is an independent management consultancy specializing in global financial services and payments. The company recently released the Advanced Payments Report for 2016, sponsored by Wirecard, a global financial services and technology company. Wirecard is considered to be a key player and innovator within the digital payments world. It assists companies such as FinTech startups, retailers and airlines to meet their digital payments requirements.

The report consolidates the views of industry executives, resulting from an online survey and ongoing research, whilst monitoring events connected with the payments industry. “While its focus is on payments, payments cannot be detached from the broader fabric of integrated financial services in today’s digitally connected world,” states the report.

“A question that arises continuously in this interconnected world is whether the banking industry is ripe for disruption? The answer to the question from many start-ups would be a resounding ‘yes’ as they discover and fill  the gaps in products and services offered by traditional financial institutions.”
— – Edgar, Dunn & Company

Digital disruption has taken the world by storm, led by companies in online booking to the travel industry, including Uber in the taxi industry and AirBnB in online room rentals. The financial industry, however, is proving to be more difficult to disrupt.

According to the report, this is due to highly developed risk management systems employed by banks, as custodians of customer deposits and lenders of funds. As a result, startups are enticed into partnerships with financial institutions in order to comply with licensing laws. They can also take advantage of widespread distribution networks and access to cheaper sources of funding.

Banks such as Barclays, UBS, and Credit Suisse all support accelerator programmes. The Barclays accelerator was a 13 week intensive program which took place in 2015. The program was offered in partnership with the Techstars global networks and included mentorship and opportunities for FinTech startups. Access to industry experts, influencers and potential clients were also on offer. 11 businesses showcased their propositions at a demo day in New york.

“It’s amazing to be part of the burgeoning fintech ecosystem in New York City and play an active part in the transformation of the industry,” said Jenny Fielding, managing director of Techstars. “The eleven startups in this class are each tackling a different part of financial services, providing further evidence that the category is a massive market opportunity. Working in unison with Barclays has proven to be a strong partnership for these high-growth startups and we’re excited to roll out additional fintech programs worldwide.”

The Edgar, Dunn & Company report state that, “Banks and payment intermediaries will always have a role to play in payments, facilitating payments via bank accounts or credit cards because consumers trust these mechanisms and they provide recourse should something go wrong.”

Yet, on the other hand, even though banks and credit card providers are continuously trying to improve on speed and security, adapting to the ever evolving internet is a challenge. Whereas, the report states, “digital currencies are designed specifically for the internet.”

Digital currencies have been around for over a decade. They are a means of exchange for goods and services, but the value is often controlled by the developers, as opposed to fiat currencies controlled by governments. The report sees them as a niche product, as their acceptance “may be limited to certain communities such as specific online games or social networks.”

Large scale companies are indeed experimenting with creating their own means of exchange in this manner, Amazon coins, Facebook credits, Clash of Clans gems to name a few. On the other hand, bitcoin has attracted its own community.

“The goal was to create an alternative to cash and remove capital control from the government and central banks. Currently, the use of bitcoin is dominated by exchange trading, with retail adoption largely restricted to niche demographics. however, it has been gaining a lot of momentum in developing countries.”
— – Edgar, Dunn & Company

While the report falls short of defining “a lot of momentum,” Brazil, India, and Greece have all experienced growth. The people of Argentina were able to use bitcoin to circumvent artificially low rates exchange rates, set by the government in a move to control inflation. In March 2013, the official exchange rate was 5 pesos per US dollar, but a physical dollar bill could be traded for 8 pesos. Merchants accepting US dollars were then losing money when converting back to pesos with their bank.

Despite growing adoption, many are still wary of bitcoin as a currency. “It has been facing a mountain of scepticism,” states Edgar, Dunn & Company. Financial institutions distrust it, viewing digital currencies such as bitcoin to be unregulated and inherently risky. Consumers shy away from its history of volatility..

“Its on-going problems with illegal purchases and money laundering certainly do not help its reputation and aspiration for mainstream acceptance.”
— –  Edgar, Dunn & Company

When respondents were asked where they see the greatest potential for bitcoin, over half see it as a means to maintain anonymity. A small portion saw its potential as a medium of exchange in developing countries, as a financial investment, or as a remittance tool. “There are apparently opposite views of where bitcoin is headed but it is almost certain that the digital currency will not be able to gain widespread acceptance in the near future,” claims Edgar, Dunn & Company.

However, the backbone of bitcoin, blockchain technology, has attracted attention from a range of industries. 70 percent of respondents believe that more financial institutions will invest in blockchain technology to trade and transfer digital assets. 65 percent agreed that the new technology will drive the creation of new payment products and services. 60 percent foresee a strong likelihood that financial services will be disrupted by providing secure, inexpensive, efficient and transparent services to existing processes. A mere 19 percent think that the technology has no future in the financial sector, but could apply to other assets such as contracts.

“While there are different speculations on the blockchain technology, its future will ultimately depend on how all those start-ups and established companies investing in the technology can successfully deliver the promised applications. Then of course, to achieve widespread adoption, it will take time until consumers, businesses and government institutions accept the decentralised nature of the technology.”
— – Edgar, Dunn & Company