Much has changed in the financial landscape if we take a bird eye’s view of the past three decades. A group of dedicated individuals went at a hedge fund, and arguable won, or at the very least made one hell of a stance. We’ve had several crises, the latest one in the guise of a pandemic. More and more people are getting into investing through apps. Crypto has been invented and is becoming increasingly mainstream. Side-hustle culture is on the rise, but so is consumer debt. Where there is flex-working there is casualization and a shift from being an employee, including various protections, into the uncertainty of being an entrepreneur, still very much dependent on the whims of a larger cooperation. The credit card is no longer the only non-concurrent method of payment. And who has even been in a real-life store lately? Given that this is past and present, what can we expect from the future of financial services?
Flexing Credit Let’s start of with flex-work. At least, that’s the nice term for it, which gets used to attract employees who are technically speaking not employees and won’t have any employee benefits. “Great” examples of the application of this scheme are Uber and Amazon (for its customer service). I will continue to refer to this as the casualization of work. What is the casualization of work? The idea that you are working for a company, but aren’t technically speaking an employee. You very likely have to pay for all your own training and equipment (massive upfront costs) as well as potentially finding your own clients, working insane hours to make ends meet as well as work at a rate that does not qualify as minimum wage. And a lot of other hidden costs that you are responsible for, as you are an entrepreneur. Legally speaking. This type of situation hits those who are financially vulnerable the hardest, and disproportionately so. I will not explicitly give my opinion on these practices, but you can read between the lines. To get back on topic: for the financial services this means a variety of things. First, it means a lot of people who have very insecure financial standing, who will need loans for the upfront costs. They are also not secure in income, and the income they do receive is often unstable and difficult to predict. From a traditional banking standpoint, this is not the type of consumer you want to lend money to. Too much of a risk, and too much risk can signify two things: no loan at all, or a loan at an interest rate which the consumer just cannot afford. With situations like this, it is not surprising that apps such as Wagestream have become increasingly popular, as they can “front” expected income, the latter being calculated and tracked by AI. But even these apps struggle with really inconsistent income, and do protect themselves against it (sensibly so), at the expense of the user. I’m not recommending everyone become a flex-worker, but we are seeing this type of work increasing every year. So whether we, from a moral standpoint, think this is okay or not, really doesn’t matter. The financial system needs to evolve in such a way that it can still cater to those who are unable to provide stability in their financial standing. The best way to do this will be through the application and integration of AI: continuously testing and redefining what it means for someone to be at “risk” of defaulting on loans, as instability is often flagged as a risk.
Flexing a House If you think the situation for smaller often more personal loans is bleak, try thinking bigger. Much bigger. The prime example being a mortgage (I really want to make a subprime joke, but I will refrain from such embarrassment). How much you can borrow in mortgage terms depends even more on stability: savings, past earnings, predicted future earnings (often supplemented by a statement from an employer to show intent to continue employing you or a contract). Flex-workers will be unable to provide the supplemental documentation described, which actually matters a lot, and their past and predicted earnings might not have the high correlation hoped for, nor the stability which financial service providers like to see.
Again, there is a need for redefining what’s can be done through the application of AI. And a lot can be done with AI, it’s a great tool. But it does need to be applied properly to benefit everyone, especially the financially vulnerable.
Neo-banking & AI I’ve mentioned AI several times now, and quite frankly, I do think it will play a large part in the financial services. As data becomes more and more available, being able to interpret and predict from it is key. Those who deploy AI best will win the race. Banks are notoriously big rather slow machines. They’ve invested lots of resources in their current systems and set-up, and aren’t keen on redesigning for every new technological whim (sunk cost fallacy). Neo-banks on the other hand, do redesign for every technological whim, because it is in the technological domain that their strengths lie. Constant data gathering and mining and the application of AI are at the core of how these companies function. They are much more agile and in tune with the “modern consumer.” It’s not surprising that the younger generations as a result take to these neo-banks. Popular examples are Monzo, Starling, Revolut, Pockit, Cleo and many more. The latter two are especially interesting as they are less mainstream and target the underbanked, often with low credit scores (Pockit) as well as deploy AI to such an extent where it can tell you whether you can afford to have takeaway tonight, or not (Cleo). This is exactly where the financial services are supposed to be heading. The financial landscape has become incredibly complicated to navigate (regardless of work casualization) and most people cannot do it with the resources (time, attention, network) available to them. To be able to ask an AI about what you can and cannot (or should not) do with your money, with the AI giving you a quick reply: “No, you cannot afford to order pizza tonight”, Is honestly all a lot of people really want to know. If the AI is then also transparent about why it makes certain recommendations you’ve got yourself a homerun. Either traditional banking gets on this level, through either revamping their own systems or increased collaboration and integration with these already existing and successful apps, or it might see a large share of consumers (and their data) disappear. Personally, because a lot of these apps don’t offer the full range of services such as insurance, mortgages etc. yet, I would really like to see increased collaboration, to integrate services better and leverage even more data.
This is part one of how I see the future of the financial services, based on the trends we have been seeing for a long time, that some institutions have been rather slow to catch onto. In the second part, which will be released next week Monday, we will be looking at what all these trends mean for our retirement, how we pay and how invest our money. And what this might look like in the future. So stay tuned!