FinTech (Financial Technology) startups are disrupting the traditional finance sector with innovative technologies and business models. As the banking industry explores opportunities to adopt this shift, it is imperative to understand the potential of collaborations. This article highlights how the banking sector can leverage FinTech and drive synergies through strategic partnerships. We will also give an outlook on the common future of both industries.
The global financial industry is undergoing a transformational phase due to fast-paced technological changes. New technology startups, also referred to as FinTech, have started focusing on innovations in the finance space following the 2008 financial crisis. The objective of these startups is to revolutionize the finance industry. The FinTech industry comprises a variety of financial businesses such as online Peer-to-Peer lending, SME finance, crowd-funding platforms, wealth management & asset management platforms, cryptocurrency, trading management, mobile payments platforms and money/remittance transfer, etc.
The FinTech Industry landscape:
% represents no. of private FinTech companies in the segment
In the fiercely competitive world, financial technology startups are up against the traditional finance sector. The main areas of competition are payment technologies, lending, retail banking and SME finance. Although the global finance sector faces stiff competition from the financial technology startups uprising, there is immense potential for technological innovations in the finance space. Even healthcare and life-sciences industries have utilized this technology to optimize their business processes, prune costs and encourage innovation. Similarly, FinTech platforms enjoy a competitive edge due to cost-effective operations and fewer regulations than the traditional finance sector.
Financial technology startups are emerging as a disruptive force in the banking industry and can draw a parallel between Amazon (it is disrupting the retail industry) and Uber (it is disrupting the transportation sector).
The new financial technology players have created a paradigm shift in the financial sector through digital innovation. Thus they are paving the way for more transparent and efficient operations.
Key Drivers of FinTech –
The abundant availability of capital through venture funding in financial technology startups, customers’ preference for digital experience, access to right talent, government backing and the quickly developing digital infrastructure are key drivers behind the growth of the FinTech industry.
In addition, the other key drivers for the industry are as below:
- Lack of trust in traditional banking, following the 2008 financial crisis motivated the customers to shift to technology platforms
- Proliferation of digital technologies such as cloud, social media, analytics, and mobile internet, etc
- Customers are more engaged with the digital platforms, including mobile devices. Thus, there is a growing demand for better financial products and services
- Millennial and Generation-Z are early adopters of digital financial products and services
- Moreover, the demographic shift and technology proliferation globally are enabling the rise of FinTech startups
- The hype around FinTech is attracting talent away from the traditional finance sector. These tech savvy talents compete directly with the incumbents of the financial industry
Growth of financial technology startups supported by private investments –
Facing increasing regulations and shareholder pressure, banks have found it difficult to develop the necessary risk culture for groundbreaking innovations. Technology-based startups are facing less systemic risks compared to traditional banks and are also exempt from most of these restrictions. Venture and private investors have poured huge investments in FinTech companies. FinTech is one of the fastest growing startup spaces with over 5,000 startups globally. The value of global FinTech investment in 2015 grew by 76% to $22.3 billion.
FinTech activity concentrated in technology hubs –
FinTech are prominently concentrated in tech-hubs such as Silicon Valley, New York, London, Singapore, Berlin, etc. Most of the players in Europe and the US are focused on the payments and marketplace lending segment. These players enjoy support from industry associations, accelerators, incubators and innovation labs.
London, a leading hub –
The total revenue of the UK FinTech sector during 2015 stood at $10.1 billion. The country is surpassing Silicon Valley, due to the rapidly growing venture investments and government support for new startups. Moreover, the financial technology community in the UK is thriving due to support from several accelerators and startup incubators such as Techstars, Level 39, etc. In addition, Innovate Finance, a non-profit membership association, seeks to address the barriers to FinTech community and help the UK attain a global leadership position in FinTech.
Furthermore, fewer restrictions about the licensing & regulation in the UK is spurring the growth of digital challenger banks such as Atom Bank, Tandem, Monzo, etc. Zopa, a peer-to-peer lending platform, plans to launch a challenger bank and offer savings and deposit services. These digital-only banks are offering banking solutions to digital-savvy customers and differentiating through transparent operations, ease of use and faster loan processing at a lower cost.
Source: Company websites, Pound to USD 1.53 (x-rates)
Global banks view on FinTech –
Several experts in the financial sector believe that FinTech is overrated and mainly driven by the external funding without any sustainable model. However, financial technology startup companies are serving the unmet customer needs and offer quick & easy processing.
“Banks to partner more with FinTech companies in the coming years to help meet changing demands from customers, there’s lot of scope for collaboration” – John Flint, Head of Retail banking and wealth management, HSBC
“Banks are a beneficiary of the FinTech explosion” – Beth Mooney, KeyCorp
“If you ask me, the biggest risk from FinTech will be in the payment systems.” – Jamie Dimon, CEO JPMorgan
“FinTech have lot to offer, they were built from the customer backwards, and we can learn from that” – William Rogers, chairman and CEO of SunTrust Banks
“Collaborating with FinTech companies is an important and mutually beneficial relationship.” – Sigga Sigurdardóttir, head of customer and innovation at Santander UK
FinTech product/services are not at par with the banks, in terms of size and security. Lending Club, a major online marketplace lending company, has issued total loans of $22.7 billion through its platform, which is small compared to $729 billion of total credit-card debt in the US. FinTech is unlikely to replace traditional banks, but it could influence the operating model of banks to cut costs and improve service quality.
Source: IDC, 2016
The majority of the global banks view FinTech as a less of a cannibalization and see it as an opportunity to reorganize their business to adapt with digital customers and enhance customer value.
Future of FinTech:
Most FinTech startups are focused on niches and unmet customer needs of banks. FinTech needs to engage at a broader level with established industry players and focus on the customer experience and services to thrive in the digital age.
Near Term
The focus on the customer centric (B2C) segment such as retail banking over the near-term will hold the key. The rate of adoption is higher in this space due to the low cost of switching and technology acceptance by customers. Moreover, FinTech will benefit from the collaboration with banks, as it will provide an opportunity to expand the customer base and develop a service ecosystem around the core offerings.
Long Term
Over the medium to long term, FinTech players need to challenge their own business models as regulatory supervision increases. They will also need to find adjacencies in the B2B space. In addition, mobile will be a most important service distribution channel in the future. Hence, FinTech players should actively engage with customers over the medium-term. Further, FinTech will have to invest in innovation, manage risks and build effective partnerships with big financial industry players. Collaboration is the way to success for both banks and FinTech players.
Bridging the gap –
- Traditional banks fall short of institutionalizing large-scale innovation due to cultural adaptability, talent shortage and lack of agility
- Banks can benefit from the knowledge of FinTech companies, and leverage the technology to develop insights about customer needs
- In addition, traditional finance players can unlock new growth opportunities through new monetization models and business processes
Collaboration is a key for success –
FinTech currently faces limitations in terms of access to a large consumer base, market expertise, brand loyalty, and capital. The incumbents could identify potential opportunities through collaboration with FinTech companies, especially in digital payments, lending, and money-transfer. The financial sector players benefit from the collaboration, as there is an impetus to reimagine the capabilities. The most preferred ways to collaborate are to create startup programs to incubate financial technology and set up investment funds to fund respective startups.
Source: letstalkpayments, news articles
Several banks realize the potential of forging collaborations and are working closely with startups through different engagement models
Digital payments a precedence:
The rise of digital commerce (ex.e-commerce) and sharing economy are shifting the landscape of the payment industry and prompting the latter to go digital. Major banks, in order to benefit from this trend, are collaborating to explore cross-border payments using the Blockchain technology. Bank of America Merrill Lynch, Standard Chartered, Westpac, Royal Bank of Canada and Santander have started working on Blockchain standards and recently formed the Global Payments Steering Group (GPSG). GPSG is the global blockchain bankers’ network with payment rules and standards.
Further, banks are not only collaborating with FinTech players but also forging cross-industry partnerships to advance the industry. The Hyperledger is an open source collaborative project of leading banks, technology companies, and IoT players to advance blockchain technology. These players are working closely to find a commercial solution using the blockchain technology, which offers transparency and interoperability.
In addition, other partnership opportunities include online marketplace lending in the SME segment, digital automation of banking processes such as loan origination, customer relationship management & marketing, and risk & compliance management, using AI and advanced analytics.
Request for consultation:
FinTech is of vital importance for the finance sector to understand and explore opportunities. If you have any queries or need assistance for business model innovation, customer experience management through digital or industry insights, please feel free to contact our team of business consultants for more details.
