Fintech Focus: Disruptors’ $4trn fortune

FINANCIAL NEWS: Goldman Sachs has estimated how much of the revenue and profits can traditional financial institutions lose to new tech players. Over $4 trillion in addressable revenues and $470 billion in profit.

Over $4 trillion in addressable revenues and $470 billion in profit at traditional financial services companies is at risk of being disrupted by new technology-enabled entrants, says a recent report by the Wall Street giant.

The investment bank took an in-depth look at what it calls the “socialisation” of finance and analysed the potential growth of what it sees as the main sectors benefiting from the changing times: crowdfunding, wealth management, payments and lending.

It defines the “socialisation” of finance as the impact of technology and changing behaviour on financial services markets. (Why miss an opportunity to brand something?)

Goldman’s report says: “The financial services industry is becoming increasingly social and democratic as it continues to move online and becomes more automated, at once empowering consumers, disrupting existing banking and credit systems, and creating new markets. This is happening across crowdfunding, wealth management, lending, and payments, among other categories, and fundamentally changing the way these markets operate.”

Here are Goldman’s key views on each of the four sectors:

• Crowdfunding: Goldman defines this as potentially “the most disruptive” of all the new models in finance, empowering networks of people to “control the creation” of new products, media and ideas. “We see these models capturing significant dollar share from traditional venture capital, production lending and media finance channels, ” the report reads.

• Wealth management: While traditional wealth management companies have struggled to capture the new generation of investors (as the cost of reaching and servicing them was bigger than how much money they actually had to invest), new entrants are using automated advising strategies, technology and viral customer acquisition to get the job done, says Goldman.

“These platforms benefit from changing demographics and consumer behavior to favor automated and passive investment strategies, a simple and transparent fee structure, and attractive unit economics that allow low or no investment minimums,” the report explains. The bank estimates that new platforms could snatch up $400 billion in assets under management.

• Socialised payments: The bank says payments, more specifically money transfer, is an area in financial services where tech has had the least impact as it has served as infrastructure for traditional credit and money transfer companies. “However, consumer behaviour is changing and we believe companies are going to be forced to adapt.” It estimates new players could stand to capture $30 billion in money transfer fees.

• Peer-to-peer lending: P2P platforms have flourished following the financial crisis because of a favorable environment for lending, says Goldman. The bank believes these platforms stand to benefit further from the change in demographics and the arrival of millennials who are increasingly in need of financial services.

“Millennials are digital natives and have an affinity for online or mobile user interfaces, automated and frictionless processes, and transparency of data and information, thereby gravitating toward platforms that bypass the traditional lending processes, which are generally in-person, involve a lot of paperwork, and can be opaque.” They call this generation “HENRY”- high earning, not rich yet. (Again, why waste an opportunity to brand something?)