The future of fintech is networked, not hierarchical. How coronavirus will usher in a new digital age, and what you can do to prepare for it.

Old, hierarchical institutions have shown they lack resilience to coronavirus. Their large properties, huge ivory towers designed to be both imposing and reflect their status, are dragging them down. They struggled to adapt to a digital world, let alone digital 2.0, or the coming digital 3.0.

The future is one of digitally networked, decentralised businesses and institutions. These are the businesses thriving in lockdown and which will continue to thrive when a new digital-first consumer emerges from isolation. In this article, I will compare the old systems of the Third Industrial Revolution to the coming Fourth Industrial Revolution, and discuss the ways legacy financial businesses can quickly adapt to become prepared for the ‘new normal’.


Hierarchies vs. Networks (The Coming of The Fourth Industrial Revolution)


Firstly, it’s important to explain what I mean when talking about hierarchies and networks. In his 2016 Book, The Fourth Industrial Revolution, Chief Exec of the World Economic Forum, Klaus Schwab, proposed that technology was leading us into a new industrial epoch.

All three previous industrial revolutions had been built on monetising labour, and making it more efficient by augmenting it with technology. This symbiosis would drive greater efficiency, but at all stages, humans of different levels of ability and skills were needed, and with it came a hierarchical structure, with any networks existing purely as an afterthought.

However, for the first time in history, machines have started to outperform the top-performing humans at certain skilled activities, and this outperformance is growing at exponential levels. Equally, networking technologies have connected the human species globally, digitally enabling more than half the population. In addition, collaborative working tools have made it easier for remote teams to work together in a more networked way, these tools ‘managing’ the workload and automating many of the tasks.

These three factors have meant old hierarchies are becoming increasingly obsolete. The ultimate goal of industrial automation is to achieve maximum efficiency, and the Fourth Revolution, built on a hybrid of physical and cyber systems, is achieving that efficiency through interconnectedness and decentralisation.

Interestingly, coronavirus has amplified this effect and will likely speed up the onset of the next industrial revolution. Being forced to work from home, even old industries that were only just getting to grips with becoming digitally enabled are now being forced to adopt digital-first practices. Only the more agile ones will survive.


The Major Banks vs. Fintech Challengers


The Covid-19 crisis produced a markedly different response between the major banks such as Barclays, Lloyds and NatWest, and the challengers such as Monzo, Revolut and Starling. In the old model of banking, hierarchies existed because customers across the wealth spectrum needed servicing in different ways. Analogue money needed huge amounts of property to store this wealth, often in imposing, intimidating and ultimately expensive vaults. Then money went digital.

Networked banking is a far superior model when the money itself is networked and more decentralised. The issue the major banks have is legacy. Everything from their software, processes, property, mindset and traditions rely on hierarchy, so change is expensive and often cannabilises their core offering or products that have traditionally made them money.

But it was precisely these legacies that made them slow to respond to the demands put on them by the government. When the government promised to underwrite 80% of the risk, the banks still retreated to safety, only issuing 980 loans against 130,000 enquiries before Chancellor, Rishi Sunak, intervened with a slap on the wrist.

In contrast, the challenger banks, already adopting work-from-home practices, were business as usual. The financial impact on their daily operations are minimal, and they can provide a safe working environment for their employees.

Eventually, some of the fintechs, such as Oaknorth, Starling Bank and Funding Circle, were also drafted in to support in issuing the Government-backed CBILS loans. Their data-driven approaches have allowed them to issue these loans much faster, with Oaknorth identifying they could distribute loans to as many as 50% of their customers in much less time than the traditional banks were able to issue them to 1% of applicants.

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