Financial services hasn't exactly been America's most popular industry in recent years.
- Banks have traditionally obtained 40% of their profits from "fee income," which are those charges for using out-of-network ATMs, for maintaining too low of a monthly balance, or for any of the other fine-print fees you never knew you triggered until it's too late. This is aggravating for retail customers.
- Consumer lenders are among the most-hated companies in our country, with predatory loans largely responsible for burdening subprime borrowers with excessive debt and for spurring the 2008 economic recession. This makes the public leery of lenders and distrustful of the fine print in the contracts.
- Even the companies who are considered best-in-class have an unflattering reputation. Wells Fargo (NYSE:WFC) was once considered one of our nation's most dependable banks. But their recent sales scandal, which opened millions of unauthorized consumer accounts, may have permanently impaired their reputation. And no one has forgotten how Goldman Sachs' (NYSE:GS) traders boasted about ripping the faces off of their clients just to generate profits. It prompted Rolling Stone magazine to famously refer to Goldman as a "great vampire squid wrapped around the face of humanity."
Those aren't exactly terms of endearment. But as hated as these financial companies may be, they still play a pivotal role in the commercial world. There is $200 trillion of debt and up to $1 quadrillion of financial derivatives circulating throughout the world right now. The businesses directing this flow of money aren't disappearing anytime soon.
However, there has been a rather profound shift in the mindset of financial services lately. Perhaps due to customer backlash or perhaps stemming from the calamity of the recession, companies are focusing much more on improving customer satisfaction. They're not only working on improving their image, but they're pouring billions of dollars into customer-friendly experiences, such as investments in artificial intelligence, mobile-first applications, and low or no-fee transaction clearing.
These low-cost, self-service improvements are disruptive to the traditional model. Wall Street relationships used to rely heavily on talking shop over front-row tickets to the Knicks' game, or at the Broadway show. But millennials seem more interested in do-it-yourself solutions that require much less personal interaction.
Motley Fool Explorer advisor Simon Erickson got a closer look at the financial industry's changes by speaking with Brian McLeod, who is the vice president of Forbes Insights (the research group of Forbes Media). Forbes educates its customers on how they can harness innovation and drive growth, and Brian has been taking the pulse of financial innovation for years.
In the following video, Brian describes the digital transformation that financial services is undergoing and how it will most affect customers. He also shares which companies he believes are well-poised to benefit, as well as his thoughts about cryptocurrencies.
A full transcript is included below.
Simon Erickson: Hi everyone, I'm Motley Fool Explorer Lead Advisor Simon Erickson, here at the Future of FinTech event in New York City. I'm joined by Brian McLeod, who is the vice president of Forbes Insights at Forbes Media. Hey Brian! Thanks so much for joining me this afternoon.
Brian McLeod: Thanks for having me. It's great to be here.
Erickson: You know, there's a lot of innovative stuff going on here at the Future of FinTech. And I know that you all follow innovation very closely as well, at Forbes. What are a couple of things that you've seen at the conference here that you're really interested in, in the FinTech space?
McLeod: Well, I think in FinTech, and across financial services in general, we're seeing a great deal of disruption. We see legacy companies that are struggling under a burden of technology.
And we're seeing, basically, an up-and-coming group of people taking advantage of opportunities that are presenting themselves through mobile, through Artificial Intelligence, machine learning ... and filling gaps that, quite frankly, the traditional financial services community has overlooked.
Erickson: So less legacy ... more open-source, more tools available, AI, machine learning, stuff like that now entering the FinTech space.
McLeod: Yeah. I think there's a mix of, obviously, tools and techniques that are available for legacy companies to become more efficient. We're seeing a lot of money being spent in digital transformation across all industries today. Quite frankly, a lot of that's being wasted because of poor planning and things like that.
But when it comes to innovation, and what's happening here with FinTech, I think there's a lot of opportunities around self-service financial services. We see companies like Robinhood out there where you can have a very mobile-first, mobile-only experience.
You see companies like Personal Capital and Betterment offering ETF experiences, or a blended experience, in terms of financial services. And I think that's, quite frankly, very disruptive to the status quo of Wall Street and financial services management.
Erickson: Challenger lenders, alternative lending ... you mentioned a few of them just recently. These are companies that have lower cost structures. They're mobile-only. They don't have physical branches or anything like that.
What's the role of data? Do you see any ... what's the role of data in all of these digital transformations, these alternative lenders? How does that impact where this space is going?
McLeod: It's probably a cliche at this point. It's been a phrase that's been used over and over again: "Data is the new oil of the economy." And that can't be emphasized enough in this day and age. It drives all the apps. It drives all the APIs. It drives all the interactions that we have. And quite frankly, today, it's about the customer experience.
For individuals to develop loyal, long-term, long-standing relationships with financial-services brands ... whether they're new or whether they're existing. It's about the company's ability to leverage data to provide a unique customer experience for them and ... ultimately, obviously, in financial services ... to provide better returns.
Erickson: And that's a big deal for financial services, right? We've gotten used to products and returns, and things like that. This is now more about experience and the relationship with your customers.
McLeod: Exactly. I think there's lots of talk out there about the big buildings, the skyscrapers, the theater tickets, the sports tickets ... the entertaining that used to happen within financial services for big clients. And now it's changing, right?
There's a millennial generation out there that values experiences differently. They want to interact on a digital basis, and interact less with people. And industries are going to have to adapt with that ... again, not just financial services, but across the board.
Erickson: Sure, OK. So adaptation, evolving, of financial services. We talked about open-source. Anything else that's sticking out to you? Or anything else that we should be watching, keeping an eye on, as investors?
McLeod: Well I think, obviously, the big theme of the year has been ... or maybe the last two years, and long before that ... but cryptocurrencies.
McLeod: And I think what we're seeing now is really some of ... you know, we've seen a lot of start-ups leveraging ICOs and things like that to develop new products and services, or simply to fund themselves. I think we're going to see that expand outside of just the start-up realm, and into the enterprise level as well.
The tokenization of everything, I think, is something that's really going to take hold over the next couple of years. I think it's an unwritten story on how it's going to all unfold. But obviously there's a lot of attention on blockchain, and a lot of attention on what's happening with these ICOs, and what that means to legacy companies, enterprises, as well as the start-up.
Erickson: Certainly makes sense. We just heard Joe Lubin with Consensus say that he had an 8 times increase in hiring this past year alone. It seems like now's the time to scale for some of those blockchain platforms.
McLeod: Yeah. Out in San Francisco, it seems like that's ... the hottest places to work are Ripple and other firms ... Robinhood, and Coinbase ... companies that are really making great, strong growth. And it seems like that's the new, exciting place to be right now.
Erickson: Thanks very much for your time today, Brian.
McLeod: Thanks a lot. Appreciate it.
Erickson: Thanks for tuning in.