You might have heard the term “fintech”—short for financial technology. But just what is it? A simple explanation is the adoption of technology to enhance financial operations by introducing new processes. I like to think of this as the “Uber-ization” of finance—innovations shaking up traditional sectors through the power of technology.
Fintech is already impacting a wide spectrum of financial activities such as lending, payments, transaction record management, insurance and many more. According to Accenture, global investments in fintech increased by 11 times to $22.2 billion between 2010 and 2015.
So what does this mean for the future of finance and in turn, the commercial real estate industry? I see potential impacts on two frontiers: within traditional finance institutions and within the emerging fintech companies that are revolutionizing the finance industry.
FINTECH WITHIN TRAD-FIN
In my view, there are three major implications of fintech for the traditional finance industry:
- Automation-induced headcount reduction
- Influx of tech employees into finance institutions
- Transformation of the conventional bank branch
The growing potential for automation will likely lead to a reduction in headcount. According to a report by Citi Global Perspectives & Solutions, financial institutions in the United States and Europe will experience staff reduction of 40 percent and 45 percent respectively by 2025 compared to their peak levels in 2013. Given the high level of technology and internet penetration, the situation in mature markets across Asia is likely to be similar.
The growing adoption of technology will also likely increase the proportion of tech employees in finance institutions. Some major finance institutions are already realizing that they can either be disrupted or stay one step ahead of disruption. From Citi Bank to JP Morgan to Deutsche Bank, organizations are developing their own fintech units, partnering with existing fintech operators or fostering fintech start-ups to increase innovation and stay ahead of the curve.
Furthermore, fintech will transform the function and appearance of the conventional bank branch. This will likely take one of two directions: a branch might shift to focus more on consultancy and advisory services or a branch might move toward more automated transactional activities.
In either case, these changes will impact branch design. We already see examples of banks utilizing the floors above their street-level branches to host consultancy operations. The interior design of these spaces often change to provide a more lounge-like, personalized feel. One great example of this transformation is the BBVA flagship branch in central Madrid, which features consultation pods, a virtual assistant and interactive digital experiences.
These “virtual assistants” and “virtual bankers” are likely to play a role in branches that move toward an automated transactional focus. This shift will likely reduce the size of such bank branches, such as the Sao Paulo branch of Bradesco Bank, which integrates numerous technological innovations ranging from biometric log-ins to virtual assistants.
THE NEXT FINTECH FRONTIER
Many of the small, rapidly growing fintech companies are likely to emerge as prominent market players in the finance industry. Some of these companies had record-breaking funding rounds. For example, online lending platforms LU.com and JD Finance had funding rounds of more than $1 billion, while companies like Oscar Health Insurance, WeLab Holdings and Betterment had funding rounds of above $100 million. Some of these companies will compete or collaborate with existing finance institutions to grow their businesses, while other companies may establish their own markets niches with innovative products.
Two fintech innovations that created their own market niches are online lending and crowdfunding platforms such as Funding Circle, WeLab Holdings, Kickstarter and Indiegogo. Going forward, it is likely that we may see more innovative technologies like these coming into the market.
For the commercial real estate industry, it’s impossible to ignore developments taking place in the finance industry. Finance sector tenants account for a considerable portion of office occupiers in prime business hubs around the world. In my next post, I will dig into the ways the “Uber-ization” of finance is likely to impact commercial real estate. Stay tuned!
Yasas is a Senior Research Analyst for Colliers International in Hong Kong. With his international exposure and urban planning background, he is well versed in the Hong Kong and regional property market dynamics.