After the financial crisis of 2008, the financial industry was rebuilding itself by ensuring compliance, regulations and leveraging new ways of doing business intro- duced by FinTechs. While the industry wasdiscovering new business models to delight its customers, the technology world was evolving in parallel. After the intro- duction of desktop computers, there was no significant disruption that impacted the financial services industry for a long time. In the late 20th century, multiple technology disruptions started redefining the way business was done. One of early disruptions was the introduction of the smartphone and its capability to receive and transmit media content.
Since smartphones required a large amount of data to be received and trans- mitted, the telecom industry started exploring ways to increase data transmission speeds. As a result, the data speeds leapfrogged in a decade from providing the GPRS- (general packet radio service) -based (50 kbps transmission speed) connec- tion in the late 1990s to 4G connections (100 Mbps to 1 Gbps transmission speed) in last couple of years. Having mobile devices and data connectivity at the most inaccessible/remote locations increased the demand further for the availability of interactive applications on these devices.
The computing power of processors was increasing at a tremendous pace and their sizes were also reducing with the same speed. This transformation coupled with the capability to transmit data at high speed enabled the proliferation of mobile devices at a tremendous pace. The high-speed data made available at affordable prices coupled by the small size of mobile devices due to the advancement in tech- nology resulted in the mobile device penetration growing to an all-time high of being estimated at two times the population of the earth. The devices connected to the Internet are identified through a binary device identifier, often referred to as an Internet protocol (IP) identifier for the device. In the telecom world, where devices were connected over a telecom network, the phone number of the SIM embedded in the device soon became an identifier of the device/phone itself. The increasing computing capability of devices coupled with the ability to transmit data at high speed changed the way people were using applications and the data therein. The capability to text across devices had also transformed the way individuals could interact with a business as now a large chunk of information could be accessed through a very low bandwidth text message as against navigating through multiple user interfaces (UIs) to access the same data/information over data/phone lines. This further changed with a drastic change in data storing and transmitting capac- ity of mobile devices and telecom networks, thus making it possible to transmit and receive large content on mobile devices. In the initial days, mobile devices were restricted to cell phones, and subse- quently they evolved into multiple devices like tablets, e-readers, etc., and were now available in all forms and shapes. Now a majority of content could be consumed on the small screens of smartphones, and the content that would need a bigger screen could be consumed on tablets, which had a screen size between a laptop and a smartphone. This helped the customer view content on the correct screen size on relevant devices, but from a developer’s perspective, it meant that the developer was required to create multiple versions of the same application so it could adapt to the different screen sizes. At the same time, due to Internet proliferation, a large part of the enterprise and consumer applications were being developed as browser- based applications. Since most of these applications were to be adapted to multiple screen sizes of mobile devices and desktops, creating multiple versions of the same application across screen sizes would have been very expensive. Therefore, develop- ers developed the concept of responsive Web design wherein one could have the same user interface page adapt automatically to different browser sizes or screen sizes, thus starting an era of developing multichannel, cross-browser responsive applications. Mobile devices are built to handle content offline and online, therefore it was prudent that they have resident applications that are secure and available to only the user of the phone. This was possibly due to the availability of App Stores from device manufacturers like Apple, Google, etc. App Stores are centralized distri- bution systems where a developer can publish his/her app and the consumer can download and use the same with respective authorization. Any of the applications installed that were not available in App Stores (centralized and enterprise), were flagged as “not secure” and had limited capability to interact with other applica- tions/data on the device. The App Store brought in technology entrepreneurship, as most of the entrepreneurs could now launch their business idea through mobile devices at a relatively low cost. Additionally, through App Stores they were able to reach out to a large number of customers globally as App Stores are available glob- ally to all mobile device owners. Since the application published in the App Stores are custom made for the device, they have a much different and appealing customer interface than the traditional websites.
The enhanced computing capability on mobile devices helped large applica- tions run on small devices that would only run on machines with good process- ing capabilities. This capability, when coupled with high network speeds, made a federated execution of applications on devices possible. FinTechs, or financial technology start-ups, were able to understand and anticipate the potential of mobile devices. They clubbed all the capabilities of mobile devices to provide a disruptive customer experience in a cost-effective way. This also meant that they had a back end processing system capable of handling the flexibility and ease of use provided by the mobile applications. FinTechs were able to deliver that as well, since they were building their back end systems from scratch and using new age configurable tools and technologies. In contrast, the traditional established players were stuck with their monolithic systems built over the years and were able to take only limited advantage of the new capabilities unleashed by the mobile devices.
In parallel, the technology with sensors was improving on an everyday basis and some of them were getting embedded into the mobile devices. All of these sensors inside the mobile devices and in other devices were equipped with better performing processors and high-data transmission speeds. Therefore, these devices could talk to each other, transmit information over Wi-Fi and the data generated by them could be analyzed to derive patterns and predict future actions. Sensors were also making smartphones very powerful devices with capabilities to track move- ments, understand speech and take photos and videos. The data thus captured by mobile devices and sensors would in most of the scenarios be transmitted to the servers hosted at a centralized location. The media transmitted by these devices in the form of text, audio, video, photos and multiple other formats required comput- ers with high-computing capabilities and a high-performance database with a vast storage capacity to analyze the data, derive meaningful trends and predict probable outcomes.
One of the possible alternatives for having a high-performance and high- capacity database was to use Big Data solutions that were under development in the 1990s, but started being tested and implemented in the early 2010s. Interpretation and analysis of the existing data was helpful in building trends and reports that could convey and understand the past better, but its real use was when the same could be utilized to understand what could be future predictions. Artificial intelli- gence (AI) combined with the high-computing capabilities of modern day comput- ers could derive existing trends by scanning through huge amounts of data stored in Big Data and then extrapolate the same to provide predictive analytics. Using high-computing capabilities, large data storage and the ability to make applications available to millions of customers world-wide required heavy-duty infrastructure to be setup. In the last couple of decades, high infrastructure costs were a major deterrent to build such a setup. In the last decade though, cloud com- puting brought in the desired disruption by enabling the sharing of hardware and software costs with multiple users at the same time. This brought down the cost of the hardware and software and transformed the industry into a pay-per-use model. The model also converted the huge initial setup cost which was primarily the cost of buying the entire infrastructure and owning the same, to renting the infrastructure thus resulting in only the rental cost. Cloud computing also helped entrepreneurs to automatically scale up and down their infrastructure during peak and off-peak time respectively. A similar change was happening through the App Store, which was transforming the customer’s’ behavior from owning the content to renting it. The impact of all this was reducing the initial setup cost drastically for the entrepreneur and reducing the cost of owning the software for customers as well, thus enabling the emergence of FinTechs and causing one of the biggest dis-ruptions in the financial services industry. Now a start-up/FinTech could start his/her business with very low seed capital and then expand elastically, i.e., renting more hardware and software capability on-demand whenever the application becomes popular or is being used by more users at a particular time. Keeping the costs low helped the FinTechs compete with established players in the financial industry.
The mobile devices were soon becoming hand-held computers with embed-ded sensors, resident applications and high-computing capabilities. But more than that they were now becoming an essential accessory. Besides being able to makep calls, smartphones could be used to start a car, pay bills, act as a remote, etc.Phones were now not only a calling device, but had become more of an essential utility for every individual. Soon, mobile devices were equipped with capabilities to access bank accounts and make payments at a point-of-sale (POS). This was one of the most critical technology (hardware and software) disruption that took thecustomer experience for making payments through a mobile device to an entirelynew level. With this capability, the customer was now able to pay by tapping thecard or bringing the mobile device to a close proximity to the point of sale system.
This transformed the entire payment industry as now paying by physical means likecash or a card was not user friendly, thus fueling e-payments for financial and non-financial applications. In fact, payments and lending were one of the first businessfunctions that FinTechs disrupted. Disruptions in payment and POS technologyhas been instrumental in enabling financial technology start-ups to bring about and new innovative ways of doing payments.
Compact sensors, enhanced processor capabilities and high-data transmis-sion speeds were bundled together into a single device called an embedded device.Embedded devices capable of communicating over the Internet were calledsmart devices. Examples of embedded devices are smart-sensing devices in utili-ties like dishwashers, ATM machines, routers, point of sale (POS) terminals, etc.
Ecosystems of embedded devices connected over the Internet is referred to asInternet of things (IOT). Financial Techs employing new age data storage and analytical tools use the data/information emitted by theses embedded devices to understand the customer behavior and as well drive preventive and corrective actions. FinTechswere able to introduce innovative business models using data/information and con-tent gathered from mobile devices, embedded devices and social media. Analyzing the data gathered, they were able to determine the paying capability, understand the damage caused by an accident, remotely diagnose patients and in some casese even paying tolls at toll booths automatically.
All of the above resulted in low initial seed capital, sharing of infrastructure andreach to a global customer base for the FinTechs. Additionally, since all the FinTechswere building their platform from the ground up, they had the flexibility to tweakor transform the business processes supporting a business. All these together notonly made them innovative but they soon started disrupting the traditional finan-cial services business. Since FinTechs were innovative, customer friendly and alsoeconomical, in no time they were quickly adopted by the user community. Soon enough the governments and regulators realized that they had to make the environ-ment conducive for these start-ups to be successful.
Traditional businesses in the past have had a complete monopolistic control over customer data, therefore, to share bank account-related information with a financial planner, one would have had to take a physical/soft copy of the relevant bank documents shared by the banks to the financial planner. The financial planner would then interpret these statements manually or through a tool and then come up with the appropriate financial advice. There was no way for the customer to share his/her bank related information online with any trusted third party despite consenting to share the information. The possible reasons that stopped traditional banks and other businesses to share the information could be:
1. No clear guidelines from any of the government entities to own up to the liability in case of fraud or failure.
2. Technically complex and expensive to build such interfaces with no potential for direct benefits.
3. Fear of the customer getting stolen by competitors.
4. Lowering revenue from commissions, as the data owner would only own a part of the transaction.
5. The perception that a cumbersome and time-consuming process for sharing would indirectly ensure customer not going away to other banks.
Therefore, to enforce data sharing by traditional banks and to encourage entre-preneurship, regulators created the provisions in the legal setup mandating tradi-tional businesses to share information and data. To offset the infrastructure costand ensure the right level of security, traditional businesses started sharing theinformation in a secure manner over the cloud. Information and data availableover the cloud helped start-ups consume the information and data after proper authentication. The entity publishing the data/information is referred to as a provider and the application consuming the data and information is called the consumer. The information and data sharing is achieved by the provider developing and publishing interfaces, called application programming interfaces [APIs]) on the cloud and the consumer calling these APIs runtime in his/her application. The entire process of publishing the API on cloud is collectively called as API-fication.
The process of API-fication involves bundling the respective business functions into a defined number of interfaces. These interfaces are then exposed using cer-tain protocols and products on the cloud. The consuming application calls these interfaces to extract the information and initiates the next part of the logic. It is very likely that the provider of information may charge a considerable transaction charge to the consuming organization depending on the business criticality of the information. Regulators and governments globally are bringing in rules regarding the monetization of API, to regularize the transaction charges that can be levied by the provider to the consumer for sharing the information. Therefore, API-fication has been one of the most important technology disruptions for FinTechs. Since they now have access to customer details directly from their established peers, they can focus entirely on creating their own innovative offerings without worrying about managing and maintaining customer details. They could get the information they seek by paying a nominal fee for the same. FinTechs are also leveraging API-ficationto monetize their intellectual property comprising of innovative technology and business functions offered by their platform. In some cases, they are also monetizing the innovative customer experience built by them by exposing the same using API.
Therefore, the monetization aspect of API-fication by the provider and consumer has led to creating an entirely new economy, referred to as an API economy.
4G and 5G Networks Fueling
The first and foremost technological change that disrupted the financial industry was the capability of the telecom industry to transmit information at high speed.
This enabled sending and receiving content at lightning speeds across devices. The telecom network responsible for transmitting data and information is referred to as the cellular network. They have evolved through several generations. The first-generation networks, often referred to as “1G networks,” were analog telecommuni-cations standards. In 1G networks the voice signals were only modified to a higher frequency and there was no data transmission as we understand today. The radio signals used were analog and not encoded as digital signals. The initial mobile transmission systems used a single channel for sending and receiving, therefore only one person could talk at a time. The user had to push a button to enable trans-mission and disable reception and vice versa. Soon the systems evolved to a dual channel system, one for receiving and other for sending. Now there was no need to push the button, as one channel could be used for sending and other could be used for receiving simultaneously. 1G networks are based primarily on analog commu-nications, meaning that the information is transmitted more as seamless waves of frequency transmissions like in the case of certain types of radio channels and not as “0” or “1” binary signals, often referred to as digital signals.
1G cellular networks were introduced in the 1980s, and the main concept was to divide a geographical area into multiple cells, all of these cells would be served by a single base station. Since the cells were small, the frequency could be reused in nearby cells, but not adjacent cells. Thus, with 1G networks, more users can be sup-ported in the same geographical area. Also, since the cells were smaller, they required less powerful, cheaper and smaller devices to transmit and receive information.1G networks brought in the terminology cellular networks and cellular phones.
2G networks are based on digital transmissions and commenced soon after the introduction of 1G networks. In 2G networks, besides transmitting informa-tion in digital mode, the conversations were encrypted and therefore more secure than their predecessor. Since 2G systems enables the phones to share the channels dynamically, therefore 2G networks were more efficient in terms of sharing the network between multiple phones within a single cell, thus allowing for a fur-ther increase in density of phones within a cell. Consequent to the high density of phones within a cell, the handsets could work with low radio power as well, thereby reducing the handset size and addressing health concerns as well. Call-drops and not getting signals in weak signal areas were the downside of a large number of devices sharing the same bandwidth, as handsets confused low signals with end of call. The 2G networks required that more cells be placed in an area as compared to 1G. Consequently, handsets were required to emit less radio power resulting in the reduced size of handsets and addressing health concerns as well.
Data services for mobile phones started with 2G networks and the initial service offered was short message service (SMS) text. Soon other data services like email were introduced as well. A global system for mobile communications (GSM), a 2G technology, operates at a data rate of up to 9.6 kbps and has been one of the most popular 2G technologies. The GSM phones could also be used as a modem for computers. Another network type in 2G networks is a code division multiple access(CDMA) network. In CDMA, each user is assigned a unique code that differenti-ates one user from another as against time-division multiple access (TDMA) used by GSM wherein each user is assigned a time slot. Therefore, in CDMA the frequency reuse is very high and many more users can be supported as compared to TDMA.
3G, a third-generation telecom network, complies with the International Mobile Telecommunications-2000 (IMT-2000) specifications covering services like voice,
Internet access, video calls and television in a mobile environment. 3G systems typi-cally support bandwidths in the range of 144 kbps to 2 Mbps, depending upon the network coverage in the area and mobility of device. The most important character-istic of 3G networks has been to support access to Internet over a larger geographic area. In 3G networks, since data is broken down into smaller packets, the packets can travel in parallel on different channels, thus increasing the data rates significantly.
Also, since the same is transmitted in a connectionless communication mechanism,the user can stay online throughout and yet not be charged for the time spent online.
Explained more simplistically, even though a 3G handset is always connected to the network, it uses the bandwidth only when needed. When not using the bandwidth, it is shared with other handsets. This was a very big enhancement over 2G networks where the connection was dedicated to the callers and was not available to anybody else while in use. This improvisation was the main reason to not only increase data speed over telecom networks but also dropping of data charges rapidly. This made it possible for a common person to own a mobile device and use all the services on his/ her phone like the Internet. This change also facilitated multiple start-ups to man-age their workforce in the field effectively as they could now use email and video-conferencing to talk to a person while he/she was on move. 3G networks significantly changed the connectivity options for an individual. Users were now able to com-municate using text message, email, video communication, audio communication and chat using social media applications. Social media applications on 3G networks started becoming successful and were being adopted widely. FinTech and start-ups latched onto this upgrade in capability of telecom networks and mobile devices to transmit information at low costs. Consequently, this enabled them to reach a wider customer base globally. Additionally, the services helped them to communicate with their customers in a cost-effective manner. Since the data service charges were also nominal, the customers were also not incurring hefty charges on consuming the information being delivered by FinTechs. One of the main drivers for the success of FinTechs was the ability of 3G networks to transfer multimedia messages, i.e., videos,photos, etc. besides text using the multimedia messaging service (MMS).
4G networks, the fourth generation of wireless standards, specified data transmis-sion speeds up to 100 Mbps for high-mobility communication zones (in cars, etc.)and 1 Gbps in low-mobility communication zones (in offices, etc.). A 4G mobile system is an all IP-based network system, i.e., it should integrate all the wireless technologies to give seamless connectivity across multiple technologies, thus pro-viding a seamless and continuous interface to all mobile users for using multimedia applications. This is possible by having a core interface between the core network and all other radio access networks and mobile users, consequently creating a single network across all the users within the network. There are two technologies that are popular with 4G networks, long-term evolution (LTE) and worldwide interoper-ability for microwave access (wiMax).
5G network,s also known as a fifth generation mobile network or fifth genera-tion wireless system, is a terminology used to talk about the anticipated next major phase of mobile telecommunications. It is expected that it builds a true wireless network to provide a Worldwide Wireless Web (www).
Various countries have adopted 4G networks very quickly and this has enabled a large number of multimedia transfers over phone services possible. In the last decade, what would have been a network of computers became a high-speed net-work of devices for phones. The capability of 4G networks encouraged people to use mobile devices for activities that they would have usually done with a computer over a Wi-Fi connection. This change in adoption of mobile devices to do busi-ness transactions unleashed opportunities for FinTechs/start-ups to build business applications on mobile devices. Additionally, the capability to transmit multimedia messages helped FinTechs interact with their users using video/text. High-speed networks fueled the FinTech revolution by enhancing the capability of phones to conduct business anywhere at any time.
Mobile Applications and Smartphones the Customer Experience As discussed in the previous section, the telecom network evolved from being a single channel service to a 4G/5G service. A similar evolution happened in mobile devices. The walkie-talkie used in World War II can be considered to be the first mobile phone. Ericsson’s Mobile System was the first partly automatic mobile sys-tem for automobiles. Phone models introduced by Motorola between 1983 and 1989 could be said to be the first generation of mobile phones that we carry today.
One of the first phones to use GSM technology was introduced by Motorola, and subsequently, IBM introduced the phone that could be considered as the first smartphone as it had a phone, fax, pager and a PDA all rolled into a single device.
It had a touchscreen and Qwerty keyboard. The StarTAC phone from Motorola in 1996 was the first clamshell pocket size phone.
The Nokia 9000 Communicator could be considered as the first smartphone in the true sense as it had a LCD screen and Qwerty keyboard and the processor in the phone was quite powerful, almost like a minicomputer. The Nokia 7110 provided content over a wireless access protocol (WAP). WAP as a technology was providing text content in a more-organized manner than simply sending text mes-sages. J-SH04, built by J-Phone in Japan in 2000, was the first smartphone to have a camera built inside the phone. It could transfer pictures using Sha-Mail (picture mail). It could also be termed as start of the MMS. In 2002, the Sanyo 5300 was the first camera phone in America.
In and around 2002, the PDA revolution started and one of the leaders in this field was Microsoft’s Pocket PC phone. It combined the capability of managing contacts, calendars, emails, etc. while integrating voice and data capabilities. Thus, with this phone one could browse the Internet using Internet Explorer. Palm’s Treo 180 running Palm OS was another phone that combined a PDA with phone ser-vices. In 2002, the BlackBerry came up with a series of executive phones that were quite secure and could be used for doing email communication, instant messaging and had a very basic browser. It soon became one of the most desired devices for it being a status symbol. It also enabled instant messaging which was named as BlackBerry Messenger (BBM). It had a Qwerty keyboard and around 3–4 lines of LCD screens that one could browse to get to the desired application.
In 2005, Motorola’s ROKR E1 was one of the first smartphones that had the capability to store and play music. In 2007, Apple introduced the first touch-screen phone in the true sense called the iPhone, which revolutionized the entire smartphone industry in many ways. The first and foremost thing the smartphone changed was eliminating the keyboard that was always available. On smartphones,the physical keyboard replaced the virtual keyboard that could be operated through a touchscreen. Additionally, one could make the keyboard appear and disappear on-demand. This led to applications that were less intensive on keying input but more intuitive to display information and click through actions using only one or two fingers. The iPhone, besides providing the touchscreen, also had a camera and music player inside the phone itself. Thus, the iPhone was a phone that bundled all the possible media formats into a single phone and had the capability to not only store the media information but also transmit and receive media content over the phone upon 3G services.
The most interesting part of the iPhone was it combined three great features:
1. You could make calls, receive calls and do all the functions a phone was expected to do.
2. You could now run the applications on the phone. The application could be a music application, a video application, etc.
3. The phone could transmit information as data streams.
FinTechs Transforming the Customer
Experience Using Social Media
In late traditional technologies, application capability was limited to the extent of managing the hardware associated with the computers. Because of computing capa-bility increasing on mobile devices, the application capability was amplified by the use of various sensors on the devices like cameras, accelerometers, etc. This brought in the possibility of an entire new set of functionalities like one could take a photo-graph of an address proof and attach it to a bank account opening form. This was in contrast to the traditional setup, wherein the same would have been done by entering the details on the online form through a computer and then scanning the photograph and attaching the same on the computer. Therefore, many such functionalities being enabled using enhanced features within the mobile devices resulted in the applications on these devices becoming more complex than the traditional desktop applications.
In addition to increasing computing capability, the associated hardware was reduced in size, thus the phone device which was bulky got transformed into a pocket device with a computing power closer to what most desktop computers would offer. Since the devices were small, their casing was also concise and could be carried to remote locations. One of the technology innovations that was impact-ing the hardware world was the enhanced capacity and reduced sizes of the battery required in the mobile devices. Increased computing capability, reduction in hard-ware size and increased battery capacity, when coupled with high speed and afford-able data rates enabled business to host complex applications on mobile devices that could even operate at the remotest locations. The most complex applications like the banking and insurance application were now available to individuals on mobile devices including the places where brick and mortar branches could not be built.
This disrupted the entire banking and financial world as what was once only possible through an in-person transaction could now be done remotely and without interact-ing with a person. The immediate impact of this was that now anybody could build a relationship with a customer base as long as they have an application that serves the customer and there is a process/system that manages all the back-office activities.
Mobile devices started getting adopted in a big way in the last couple of decades.
This was the time frame the digital native generation was getting raised using these design. This generation started having a strong dependency on using these plat-forms. Most digital natives are now earning adults, and for them mobile devices are similar to what microwaves and washing machines were for the baby boomer generation. The baby boomer generation was awed by the microwaves and washing machines, which has now become an inseparable part of the same generation and they would feel out of place if they did not have access to these machines. Similarly,the digital natives would consider mobile devices an inherent part of their life and would get lost if they did not have these devices around. FinTechs and start-ups were quick to realize the opportunities arising because of these devices and started building products that were suited to the new generation. They had all the elements of making an engaging product either through gamification, price competition,brand adoption and brand discarding.
Digital natives are used to communicating using these devices, even if they are sitting next to each other. The dependency on devices is also catching up with other generations as well. Start-ups leveraged this to let their product be known to a wider community using peer-to-peer (P2P) communication and social media. This word- of-mouth publicity and advertising their product through social media helped com-panies not only to save on advertising costs but also addressed issues and concerns of people more effectively. Now they were able. to address the issues at point-of-impact,as the customer could convey and communicate the dissatisfaction with the product right there and then. Start-ups were able to save costs on setting up high-end help desk operations and at the same time increase customer satisfaction leading to higher adoption rates. In fact, some of the start-ups used the concept of social media to bring about the sharing economy, a new age concept where people share apartments,cars, books and multiple other things. Then there were financial technology start-ups who came up with products that could provide functions like KYC, customer onboarding and fraud prevention using social networks.
In summary, the social media ushered in an entirely different kind of world order and an economic cycle that was quite different from the traditional indus-tries. One of the big changes that social media brought in was that now people were able to connect among themselves in a seamless manner and at the same time were able to conduct business as well. Additionally, since the digital native generation trusted digital media more than in-person sales representatives, they considered transacting using social media more trustworthy than transacting in person. During the same time, social media platforms like Facebook enabled the capability to launch applications and websites within their platforms, which was soon followed by multiple other platforms; soon this became the new mass media communication platform. If a start-up had a good proposition to offer, it could get itself live on any of these social media channels with its own website and it would be known to multiple other people using the “share” and “like” concept. The social media platforms have the information for an individual’s contact stored locally.
Some of these platforms also let you know if you can connect with a stranger using your contacts. This has helped people grow their contacts network exponentially by creating a chain of multilevel contacts. FinTechs and start-ups have leveraged this capability of social media to effectively connect to multiple prospects by creating a chain of references. Some FinTechs have also used social media to effectively raise funds for themselves. Other platforms have used the same for charity and donation purposes. Some of the platforms have gone ahead and even crowdsourced work from multiple people using social media.
App Stores Helping FinTechs Expand Globally
The introduction of mobile applications has been one of the single largest disrup-tions in the manner we consume content and functionality. Every organization interacts with its customers through content or functionality. It could be a catalog of insurance products or functionality like an account summary, etc. Therefore,we can summarily say all the applications interacting with customers primarily are comprised of content mixed with business functionality. Initially, the applications were available with very simple user interface elements on the client, and most of the business logic was residing on the server. The websites were only rendering the information received from the server and the business processes were being exe-cuted at the server. This resulted in a restrictive customer experience, as the applica-tions were downloading and rendering minimalistic user interface components on the browsers. A highly interactive customer experience would mean downloading enormous amounts of user interface components. This in turn would impact the rendering time for the application, thus offering a slow user experience. The per-sonalization of the user experience was strictly no-no as it would mean provisioning for more performance load on the server as everything was rendered from the server and an additional logic would typically slow down the response of the application.
Another alternative was to have a dedicated client interface residing on the cli-ent’s machine so that complex customer experience could be executed locally with high performance. The only challenge with this approach was to control distribu-tion as there were multiple different OSs and devices that would be required to run the same applications. Additionally, there was always a problem of providing upgrades across multiple platforms and lastly, the governance for notifying and publishing upgrades was also very complex. The only alternative was to rely on the centralized Web-based online applications rendered through the bowsers.
FinTechs Make Payments Seamless
Using Mobile Payments
The advancement in mobile technology has enabled mobile devices to initiate and make payments. In addition to making online payments, the devices have been enabled to make payments at different POS systems as well. These technologies have turned mobile phones into a virtual replica of physical wallets, including the capability to execute payments in a secure manner. In the early days, quick response (QR) codes were considered to be a viable option for doing mobile payments. They were more commonly used where both the transacting parties were trusted parties, that is, an individual making a payment to the merchant required to be a registered and autho-rized customer by the merchant. Payments made by customers at Starbucks using the Starbucks app is an example of the same. Since QR codes are easy to replicate, therefore, they have been considered as a less secure solution for mobile payments.
Subsequently, mobile device manufacturers and telecom providers together intro-duced SIM cards to store payment instruments like credit and debit cards virtually and securely using encryption. The wallet applications on the mobile devices used this information store on SIM cards to make the payments. Again, this was a closed group-payment mechanism since only the applications registered and authorized to make payments by the merchant could use this mechanism of payment. The mobile payment space transformed dramatically when near-field communication (NFC) was introduced into the devices. NFC, a technology evolution of communication proto-cols between devices, enabled devices to communicate over radio frequencies with each other in a secure manner. NFC has its own standards and encryption algorithms to transmit information between devices. This can be loosely compared with the pro-tocols and encryption standards followed while transmitting credit card information between multiple entities initiated through a card swipe at POS.
There are other mechanisms like Bluetooth which can be used to communi-cate between devices, but NFC technology enabled devices to communicate with
each other consuming less battery power. This was important for mobile devices since they would have limited battery capacity owing to their small size. Also with NFC technology the entire experience of making payments has also transformed radically. The payments could now be done either by bringing the device closer to POS or by tapping on the POS device. The cumbersome process of pairing and then providing payment-related information all gets done implicit to the end user.
Therefore, it is prophesied that NFC and similar technologies would reshape the way we understand and do payments. Many retailers across the globe have already enabled their POS terminals to accept payments from devices equipped with NFC. Devices communicate using NFC in the following ways:
1. Two-way communication—Both the devices are active devices, i.e., they can transmit information both ways and can read/write to each other like exchanging contact information, etc.
2. One-way communication—One device is an active device and the other one is a passive device and the most common format in which this is used is by embedding a NFC chip in the customer’s mobile device or in the plastic card issued by a issuer (bank/credit card company). When the active device comes in contact with the passive device, it reads and writes back to the passive device and then enables payment by just tapping the phone device or plastic card on the POSterminal.
It is the second type of NFC communication that is being used in enabling NFC payments through mobile devices. If the POS systems are enabled with NFC, the user will have to launch the NFC application on his/her mobile device. The phone is then tapped on the card reader. Some terminals may ask an individual for addi-tional authorization like providing a PIN number, passcode or finger scanning.
The payment is done after transaction validation and authorization steps are com-pleted. Payment solutions like Samsung Pay and Apple Pay have emerged recently that enable payments using NFC. Additionally, Samsung Pay has also provided interfaces for a magnetic stripe reader, using a technology called magnetic secure transmission (MST). Magnetic stripe readers in the traditional payment world are used to swipe and read plastic credit cards which are placed inside the credit card readers at most of the existing POS terminals. The card readers work by
swiping the physical credit card and transmitting the relevant information to the respective payment entity. Since Samsung Pay uses MST, it can make payments through mobile phones at these terminals as well. The individual needs to select a card from Samsung Pay (an application within the phone) and just bring his/her phone within an inch of the swipe readers and then authenticate using his/her finger print on the device. This would emulate swiping of a physical card on them stripe reader. All of this can be done without even unlocking the device.
It provides a seamless payment experience to the customer and is very well poised to become the solution for future payments. There are multiple other payment solutions that have emerged like ALipay, AndroidPay, etc. due to the enhancedcapabilities of mobile devices.
Loyalty Redefined by FinTechs
As stated in previous sections, mobile applications started leveraging the embed-ded sensors to provide an exemplary customer experience. Consequently, some of the key business functions associated with the shopping experience that got transformed by mobile applications were payments, loyalty, promotions, offers. The new age mobile applications in these business areas have impacted the way customers accumulate and redeem loyalty points, avail dis-count coupons and promotional offers. Customers would accumulate loyalty points when they purchase a product from a respective merchant. Traditionally,redeeming loyalty points would have mmerchant’s loyalty application online at home or work. They could then redeem their loyalty points by ordering a product out of limited options available from the loyalty website. A customer would have to proactively check and validate when and how his/her loyalty points were expiring. Since most of the loyalty points were accumulated by people on the move, the entire process of managing loyalty points became a time-consuming affair for the highly mobile and loyal customers. A large portion of the loyal customers were affluent customers and were able to accumulate these points because they could afford high-value pur-chases. For these loyal customers, using and operating these online applications was not only time consuming but also did not offer a good customer experience as well. Thus, overall, the entire loyalty experience was indirectly impacting the brand perception and was defeating the very purpose of loyalty programs to encourage customer stickiness. customers accessing the respective.
One of the other impacts of high-speed networking is cloud computing, a concept that was similar to using computing power as utilities. Cloud computing is primar-ily based on the concept of virtualization of hardware resources. In cloud comput-ing the hardware resources, typically the servers that host and run the applications can be provisioned automatically, without any manual intervention from any of theusers. Though the concept is being discussed extensively in research labs and edu-cational institutes a couple of decades back, its practical implementation started inthe last decade. The three primary reasons that were responsible for making cloud computing a reality were
◾ Increase in network transmission speeds
◾ Low cost yet compact hardware
◾ Service-oriented architecture
◾ Increased automation in deployment processes
Anybody Can Start a FinTech Using Pay-per-Use Models from the Cloud computing also made the sharing of hardware possible between differentusers without the end-user of the application experiencing any of such switchovers,thus providing a high degree of availability, accessibility, scalability and perfor-mance. One of the biggest advantages of cloud computing is it converts the capitalexpenditure to operational expenditure. Therefore, in cloud computing an organi-zation pays for the infrastructure that it only uses and does not pay for ownership of the entire infrastructure.
The server farm or data centers required for the cloud setup is done at low-cost locations. The entire low-cost infrastructure setup can be offered at an affordable price to enterprises and individuals remotely. It is rented and can be monitoredfrom any location using a mobile device or a browser. This in turn reduces the over-all cost for an organization, especially the ones who are starting up. Cloud comput-ing also provides elasticity of the infrastructure, an important aspect for FinTechsand start-ups to manage unanticipated peak loads. It means that during peak load time the cloud service provider can automatically add additional hardware depend-ing on usage and load to meet the demand on the increased user base, thus provid-ing the desired throughput, and it can scale it back when the demand tapers down.
The rental cost paid by the application owner is only for the hardware that was used at different points in time and not for the entire hardware. This makes the entirep roposition promising for most start-ups, and FinTechs especially, during their pro-motional offer/launch. Therefore, with cloud computing the scale at which FinTech products are being adopted determines what the FinTechs spend on infrastructureand can go up and down based entirely on adoption and usage patterns.