What are the problems facing the contemporary banking system and how do international relations affect the efficiency of financial technologies? Venture investor and entrepreneur Victor Orlovski speaks on the issues.
Victor Orlovski’s views on the types of financial technologies
Conventionally, modern financial technologies can be divided into a number of categories:
- New banks, or neo-banks, which perform the functions of a ‘money marketplace’. These entities use surplus funds from some clients and transfer it to others, while also providing payment, logistics, and other services. New banks, according to Victor Orlovski, provide a greater range of services in a more convenient fashion than old-style banks, but, in fact, they do not offer anything innovative. Neobanks have not ‘invented’ anything other than a less cluttered user interface and real-time transitioning. But even these minor factors proved to be a breakthrough and served as an impetus for the mass use of neobanks, especially by the ‘digital native’ generation of users. As a rule, most neobanks do not have independent licenses and work as banking organizations that have no native intuitive interfaces. It is true, however, that both the interfaces and the means of interacting with consumers are being commandeered rather quickly and cannot serve as long-term competitive advantages.
- Credit-tech, lending platforms. Basically, these are monoplatforms that do not seek to become banks in the pure sense of the word. They are engaged in lending through microfinance, installment products, such as Buy-Now-Pay-Later (BNPL), credit card issuance, mortgages, etc. These solutions often provide a convenient interface for user interaction, good marketing approaches, and a modern, technologically advanced decision-making algorithm. However, classical banks still take up the niche of platforms that ensure the functioning of the credit pipeline and the maintenance of liquidity.
- Payments. These include master payments like internal transfers, P2P (peer-to-peer), payments between legal entities, interstate remittances, or payment gateways for online and offline transactions. Payroll systems on platforms that aggregate freelancers and give them the opportunity to receive payments for the work they do are also in this mix. These go along with the numerous attempts at creating decentralized solutions for payments on a blockchain architecture, or the so-called Web3.0. All this forms a huge ecosystem with a strong network effect and is therefore very popular with startups. Payment solutions are becoming more of a targeted product nowadays, a niche. They often form a technological infrastructure, like Stripe, and are sometimes combined with a loyalty program, like the American Bilt Rewards, which offers a platform for paying apartment rent.
- Banking services. The next major category includes the various banking services that range from data aggregation to scoring, cybersecurity to monitoring and analytics, and marketing to data management. These are the built-in functions of the banking infrastructure, the products that finalize financial transactions. There are many solutions in the sector, which is a hypercompetitive one, growing and highly demanded in the financial market.
- API services. The next large-scale industry, according to Victor Orlovski, concerns banks as a service. This is the so-called Embedded Finance sector. Settlements, payments, loans, guarantees, letters of credit – all of these are just the final stages of more complex transactions. The solution itself is simply built into the process of organizing and implementing a transaction, encompassing any industry – from construction to logistics. Of course, every industry has its own nuances, and the built-in finance factor therein is invisible, but very functional. Such functions organically complement and complete more sophisticated technological solutions. They are now gaining momentum and becoming a major trend. Many analysts note that we will stop considering finance as a separate function in the near future, as it will be built into industrial solutions through an API. The latter is the procedure for calling a particular function, to make your own service (White Label service), a payment for example.
- Compliance solutions. Orlovski Victor singles out these solutions as a separate domain, since compliance is practically the main business of modern banks, its basic function from the point of view of the state and the supervisory authorities. There are various forms of compliance like KYC, Anti-Money-Laundering, regulation, and others. Victor Orlovski also mentions services in the security domain (cyber protection), as well as other issues related to the continuity of the banking business.
When taking a brief overview of banking, it is also necessary to consider the problems that customers face. We will conditionally divide them into several categories:
- Legal entities and companies;
- Individuals.
According to Victor Orlovski, the most serious unresolved problems in the modern world of fintech are related to small and medium-sized businesses, which banks have not yet learned how to cooperate with effectively. Startups that use the services of venture capital funds, not banks, are a prime example of this factor. The growing problems of international payments, especially the C2B and B2B segments, stand apart. In a world of deglobalization and global distrust, this problem is becoming increasingly acute.
If we talk about small and medium-sized companies, these could be considered the ‘tough nuts’ that banks have not yet managed to ‘crack’. First of all, according to Victor Orlovski, this is because small and medium-sized businesses are difficult to segment. Finding a common solution for different businesses is extremely difficult. Although, of course, this direction can be one of the most profitable for banks.
Medium and large companies engaged in international business are also suffering from the loss of financial decisions at the interstate level.
The causes of deglobalization, which is gaining momentum in the modern world, are a separate issue for discussion. Victor Orlovski considers conflicts and reactions to the pandemic to be a consequence of such, not a cause. The reason is the fundamental shift of the world from globalization to very profound localization across countries and regions, including due to the development in technologies (from centralized to decentralized production), the changing role of the media (due to the transition to a digital economy), and the transforming roles of states, which are all becoming more isolationist.
Thus, the ever-increasing complexity of global financial transactions is a consequence of mistrust that has arisen around the world. This, according to Victor Orlovski, is a major problem for medium and large international corporations. Large companies have so far managed to cope with these issues, but the smaller ones are facing considerable difficulties, since it is very difficult for them to become global due to the fact that the system of international payments has not yet been destroyed, but is already disintegrating right before our eyes, especially in developing countries. The solution to this problem requires coordination of the efforts of many states, a serious revamping of international relations, and regulation of the global banking sector.