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How Millennials Are Driving Fintech Innovation

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A quick look at GoogleTrends shows that the search term “fintech” was not commonly used until early 2015 when a sudden spike in interest emerged. The term, which defines innovative financial technology, has now become commonplace.

Fintech is survival

Surprisingly, some of the organizations working to coin the term are the most entrenched financial services firms in the market. These more established institutions have gone from fighting industry disruptors to joining them.

While greater efficiencies and access to new markets are some of the benefits technology can provide to established firms, technological savvy is now a matter of survival for financial service companies. Consumers, especially highly sought-after millennials, were born in the mobile age and use their phones for everything. If the user experience is not there, neither are they. 

Some companies are achieving technological advances by acquiring or teaming with existing fintech firms, while others are creating their own technology businesses from the ground up. With the cost of establishing an internet-based start-up falling substantially from $3 million in the 1990s to just $300 today, this activity is only expected to continue.

Many large financial institutions have hired heads of innovation, launched incubator programs and actively sponsor and attend fintech industry events. These companies hope to acquire or license new technologies for a fraction of the cost of building internally.

A few examples of industries which are rapidly adopting fintech to reach out directly to consumers include banking, real estate investing and insurance.

Banks ease into fintech

Few industries are more at risk to losing customer share than banks. Research from FICO indicates millennials are two to three times more likely to switch banks than other generations.

This necessary transformation is far from easy as banks grapple with complex regulations, legacy systems and ever-evolving customer expectations. While not an easy transition, many banks have embarked on a journey from a sales and product mindset to one that is more customer-centric.

Research shows that the global banking industry will spend $519 billion on IT in 2018 (up from $499 billion in 2017), sending technology budgets soaring.

For example, Capital One has undergone a makeover from a banking company into a software development company that also happens to offer banking, complete with branches operating out of coffee shops. The shift comes with changes in talent and culture that require Capital One to operate more like a fintech company than a traditional bank.

This is a pretty smart move considering a report by Millennial Money Mindset Report, which shows 88 percent of young adults would prefer to never set foot in a physical bank branch.

While not a traditional bank, 150-year-old Goldman Sachs has also jumped on the game and is marketing heavily to consumers. Its new consumer-facing online bank, Marcus, is taking a bite out of consumer lending, one of traditional banking’s largest profit centers. The digital platform intends to help customers better manage their debt through personal loans and online savings accounts.

“The latest entrant in the fintech revolution are the incumbents themselves,” says Jason Henrichs, co-host of “Breaking Banks” and managing director of Fintech Forge. “They are launching solutions at a pretty rapid clip to increasing customer engagement and retention.”

Real estate and private equity investing 

There are few industries which have been less inclusive to consumers than private equity and commercial real estate investing. Many of their sites often featured little-to-no information for public consumption. Some even kept generic company information behind a login screen.

The last decade has witnessed an exponential shift in private equity and real estate investing technology start-ups. In real estate, cumulative investments in these firms grew from $2.4 billion to $33.7 billion, with a good deal of those companies launching direct-to-consumer investment products.

Traditional financial institutions, including Blackstone Group and Casoro Capital, two established players in the private equity real estate industry, have both launched direct-to-consumer non-traded real estate investment trusts (REITs). 

“While we have traditionally only worked with other family offices and institutional partners, we see the launch of our new direct-to-consumer REIT, Upside Avenue, as a way to not only increase customer adoption, but to also lower overall cost of capital,” says Yeun Yung, CEO of Casoro Capital. “Times are changing, and technology is lowering barriers to entry at all levels. We’ve all seen what happens to institutions that don’t evolve.”

Insurance and “InsurTech”

Insurance carriers have also turned an eye to fintech to increase customer adoption, shorten the onboarding process, lower costs and maximize customer retention. According to Willis Towers Watson, a leading investment bank in the insurance industry, 2017 saw $2.3 billion in new insurtech investment. This represents a 36 percent increase from $1.7 billion in 2016 and is the second highest total for any year-to-date.

From the use of selfies in insurance underwriting to Uber-style insurance adjusters and drones being deployed to accident sites, insurance is changing at a rapid pace.

Legal & General Insurance, one of the oldest insurance companies in the market, has created a new business line to build and buy into a range of fintech companies. They’re doing this in an effort to increase products which can help them increase outreach to customers while decreasing risk.

“Digital innovation is our chief focus, to support our distribution partners and clients,” said John Hyde, managing director of direct insurance at Legal & General. “It’s no secret the insurance industry hasn’t always been at the forefront of tech adoption, but it’s critical that, alongside our partners, we meet customers where they are. And that means on their smartphones, via text, via phone — wherever they need us to be.”

To reach more mobile customers, State Farm is trailing its own InsurTech, HiRoad Assurance, in Providence, R.I. Drivers who install the HiRoad app are rewarded with savings on their auto insurance monthly bills when they drive safely.

While the technology landscape is slowly changing, there is still a lot of room to grow and evolve. With the institutional establishment bringing their industry experience, extensive internal capabilities and capital to the table like never before, it seems fintech’s ascent has only just begun.

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