The World Economic Forum released a reportthis week examining how fintech startups---the venture-backed upstarts out to reinvent financial services---are changing the finance industry. Sounds like a cure for insomnia, right? Not for the global financial giants who make billions by ensuring their industry changes as little as possible. To them, the report reads like an annotated script of their nightmares.
The WEF interviewed more than 100 executives at global financial institutions and fintech startups. In lackluster corporate-speak, here's how their bad dreams sound: "Some of the world's largest finance sector companies are reviewing their business models following the rapid growth of 'fintech' entrants in the sector."
They should. The upstarts are reshaping our experiences of payments, investing, lending, trading, and raising capital. The financial sector, meanwhile, has long depended upon a high-margin business model that counts on consumers having few options. Now banks, credit card companies, and brokers are watching the new guys encroach on their turf and take money from their pockets.
And their next target may be the juiciest prey yet: insurance.
Peer-to-peer lending, mobile payments, and algorithmic financial advice are among the key innovations forcing the old-guard to up its game. Major banks and brokerages find themselves directly competing with, acquiring, or copying many of these ideas to remain relevant. Despite the scramble, companies from Lending Club to Square to Wealthfront have found broad markets and continue harrying the established players.
“We found that successful disruptors were following a pretty deliberate and predictable strategy," says R. Jesse McWaters, lead author of the report. "They were taking a highly targeted, niche solution, and they were aiming those solutions at the intersection of where established companies were making good money, but where the customers were very frustrated."
While banks, for example, may charge you high fees for overseas money transfers, upstarts like TransferWise make international transfers quick, easy, and cheap. Similarly, banks may use certain data, like your credit score, to decide whether to loan you money. Fintech startups such as FriendlyScore use real-time data to determine your creditworthiness by tracking your habits alongside those of your friends.
By using smartly designed apps and massive troves of data to automate the things that used to require real people and mounds of paperwork, many startups are offering better experience, faster results and lower costs than traditional banks and brokerages.
“Irrespective of who comes out on top in that competition, the end customer is the real winner,” McWaters says.
But while banking innovations are happening on all sides, insurance may soon feel the greatest "impact of disruption," according to the report. “Insurance has been an extraordinarily stable business for a very long time,” McWaters says. “There's a recognition from many insurance executives that we talked to that the culture of innovation within their institutions are very weak.”
After all, if consumer friction, high cost, and inefficiency are the main spurs to “disruption,” insurance is ripe for it. People hate insurance. Prices always seem arbitrary and far too high. It's nearly impossible to compare policies and options. Even when you think you get what you want, there’s little transparency in coverage and services. Yet people need insurance.
According to the WEF's report, new entrants have cropped up in a few key areas. Online price aggregators like BizInsure, GoCompare.com, or Google Compare (yes, that Google), are helping consumers compare alternatives and get the best price. Health insurance startups such as Oscar and Vitality have found focusing on overall wellness and customer happiness encourages customers to stay healthy and fit. And car insurance startups are using auto-tracking devices to teach newer drivers how to stay safe (Marmalade Insurance) and help locate cars if they are stolen (Insure the Box).
And insurance doesn’t just have to be about safeguarding against things going wrong, McWaters says. Oscar, for example, gives its customers a fitness tracker, encouraging them to earn a dollar for reaching their daily steps goal. Beam, a dental insurance startup coming later this year, is offering customers Internet-connected toothbrushes to encourage healthy brushing habits.
These kinds of tracking devices, along with smart cars and homes, may lead not just to safer lives but more personalized insurance, McWaters explains. That's because in theory, if insurance companies can better track what you do, when, where, and how, they could proactively manage your risk---and charge you accordingly. Your car could tell you what route to take when your normal drive home is blocked in a snowstorm. It knows you tend to skid in the ice. Your smart house could send you alerts to remind you that your iron is still on. It knows you're the forgetful type. And your wristband could tell you to get up and take an extra walk. It’s good for your health---and for your policy.
All of that may sound great at keeping us healthy, safe, and a few bucks richer. But as we increasingly become walking sacks of data, such scrutiny also raises questions about how much data (and what kind) can and should be legally tracked and used by insurance providers to determine how much to charge you. Insurance companies already face concerns over what data is fair game---whether it's credit scores in determining car accident risks or genomic data in predicting impending health issues.
But for now that's still the future. While a few new insurance upstarts have cropped up, their numbers don’t rival the huge influx of scompetitors to services offered at banks. Ironically, McWaters says, that lack of competition is starting to worry big insurers.
"For some, it's a cause for concern because it isn't giving them the opportunity that bankers have today to learn from and collaborate with the various financial services innovators," he says. "The boom in fintech is almost a way of externalizing research and development." Just like the rest of us, insurers will have to wait and see what comes next.
