How software is eating financial services

This article was co-authored with my colleagues Ivy Lau and?Usman?Ahmed?

Ten years ago today, Marc Andreessen published his oft-quoted op-ed “Why Software Is Eating the World.” In the ensuing decade, the financial services industry has been transformed by technology. As the prescient venture capitalist pointed out in his op-ed, the financial services industry has had a 40-year relationship with software. The ubiquity of the mobile device and the unforeseen COVID-19 pandemic accelerated the transformation faster than anyone could have predicted. Whether it is online shopping, or in-store contactless payments, increasingly our financial transactions are powered by software. Cash usage continues to decrease, and larger swathes of our financial transactions are now safer and more convenient because of software.?

Today, there is a mobile software app for every aspect of your financial life – from splitting expenses with friends on Venmo, to investing your extra change on Acorns, topping up airtime on M-pesa in Kenya, or maximizing your savings interest rates in Europe with Raisin. As mobile data transmission speed goes up and mobile network infrastructure costs come down, we can expect software to be a more prominent focal point of our financial lives.?

Fintechs and neobanks are not the only companies embracing software - traditional banks and credit unions have also been upgrading their infrastructure. Customers can log into their account to deposit money, move and manage balances, pay bills, check their credit score, or cash a check by taking photos of the check on the app at their own convenience. In fact, traditional banks have embraced fintech providers that offer “as-a-service” solutions to perform functions as specialized as know-your-customer (KYC) checks, and as cross-cutting as open banking. Software has made it possible to conduct financial transactions outside the confines of traditional hours of the staffed brick-and-mortar branches. Thanks to software, financial life has become more convenient and accessible than ever before.?

Software does more than facilitating on-demand access to information or connection between two counterparties more efficiently. Software ate financial services because it has the horsepower to aggregate and process far larger quantities of data at faster speed than analogues in ways that yield unprecedented benefits to consumers. Take fraud detection for example – algorithms can take in hundreds of variables to determine whether a transaction is safe and secure, without which e-commerce would not be trusted, reliable or scalable, and we would not be able to buy from the unlimited global shelves of goods from the comfort of our own couch.?Software has turned commerce upside-down – we do not go to the shop anymore; the shop comes to us.?

Software can embed financial services in every offering. To assist with cashflow management, software has made it possible for employers to provide early wage access to employees through apps such as Even. Small businesses can apply for working capital loans, send invoices and receipts, pay suppliers, budget, and take care of bookkeeping needs online. Software also gives nonprofits the tools and capacity to launch fundraising campaigns online and integrate accounting with donor management at scales larger than before. In China, the ancient tradition of gifting red envelopes took on a modern twist when friends and family send them to each other in software-powered messaging apps and mobile wallet systems instead, which are also the key technological building blocks for innovative group shopping apps like Pinduoduo.?

Software will continue to eat financial services in the future through exciting developments such as artificial intelligence and digital currencies. Robo advisors are providing automated algorithm-driven services to help optimize ETF portfolios, but we have yet to tap into the power of AI for our most complex and sophisticated financial decisions.?Blockchain and other technological innovations such as quantum computing hold tremendous potential to make financial services even more efficient, affordable, and secure. Over eighty central banks around the world are researching the technological and policy requirements of Central Bank Digital Currencies (CBDCs) and exploring their potential to lower the costs of cross-border payments and increase financial inclusion. Software has certainly eaten the financial services industry, and it also holds the key to the next wave of fintech innovations.?

There is, however, a major challenge for software in our industry. Right now, financial intermediation is too expensive and there are too many people who are on the fringes, or completely left out, of the benefits of digital financial services. Our hope, and what drives us here at PayPal, is to make sure that that software delivers a more inclusive version of financial services, one that enables secure, reliable, and trusted access that empowers people around the world to improve their financial lives.??

#software?#innovation?#fintech?#inclusion?#future