Navigating FinTech disruption is on top of the executive agenda of the traditional Financial Services organizations. FinTech start-ups continue to attract investment with the total invested globally at $3.2 billion in Q1 of 2017 . The growth is fueled by the “growing discontent in traditional banking models, demands for accountability and an increasingly digitally focused customer base” that has reiterated the core needs for new modes of finance in a the diverse and complex world”, according to Innovation Finance. In this blog we will discuss the framework for banks to establish working partnership relations with the FinTech companies that are mutually beneficial.
The pace of change in the sector of the Financial Services at the convergence of Finance and Technology is only accelerating. The companies now have to look beyond the digital transformation into the technology forces behind the Fourth Industrial Revolution fueled by the convergence of the digital, physical and biological realm. It has a potential for the profound impact that the technologies such as AI, VR/AR, machine learning will have on income inequality, informal economies and payment systems for billions across the globe.
This is already a daily reality for front runners, who are providing solutions to the unbanked and underbanked and redefining the ways in which customers interact with money.
Not many traditional banks that are the largest informational companies in the world, can keep up with those changes, given their legacy systems and processes. Which brings to the front the importance of partnering with the newcomers. This topic was recently discussed by a panel of prominent FinTech thought leaders titled “New Rules Of The Game: Partnership Instead Of Competition”.
Watch the video to find out how financial services organizations may benefit from the new technology solutions centered around connectivity, interactivity with customers, real-time decision making as well as automating and digitizing processes. Learn about the best practices and frameworks for building the FinTech – Banks partnerships:
Fintech Revolution- How it all Began
When the global economic crisis hit big and small companies, many of them adopted a shift in approaches to be able to survive the turbulent economy. The world’s largest banks, however, have mostly opted out of this change because of the belief that they were “too big to fail.” And in most cases, the approach worked.
But a decade later banks have lost balance and lots of income because of the rise of financial technology start-ups. Labelled as “FinTechs”, these companies have shown such great growth in such a short time, that they left lots of traditional financial institutions in awe. The “banking-as-usual” had created a vacuum that these startups were able to break into with innovative, groundbreaking solutions that introduced ease and accessibility into the world of finance. And what do customers want? They want new and more convenient ways by which they can use digital devices to pay for goods and services, something offered by FinTech companies abundantly.
Just to see how massively FinTech startups have taken over the financial niche, let’s look at some stats:
Global investment in Fintech currently makes up a staggering $25 billion.
Total global investment since 2010 has been $80 billion. Dollars invested grew from $12.7 billion to $13.6 billion year over year. (source)
- Startups are aggressively growing in number, reaching millions across the globe.
43.4% of people using FinTech services choose to do so because of ease of access
Another 15.4% list lower rates as the number one reason that attracts them to FinTech. Other common reasons include access to a wider range of products, better user experience and the fact that FinTech companies are more “trustworthy” than banks.
The way FinTech companies are taking over huge proportions of the financial market has left banks with the need to embrace this coming change. The FinTech industry isn’t prone to the friction that appears in lots of niches with technological backgrounds, so there is large ground for a number of business models and approaches that are able to offer better experiences for the end user. This competitive advantage that these companies have over banks is the reason why trying to compete is not the cleverest decision for traditional financial institutions. Given that technological innovation isn’t going to slow down anytime soon, banks have to adjust their operations and choose the path of partnership with FinTech companies. How should this happen?
How can banks work with FinTech companies?
Partnerships are possible between traditional large financial institutions and disruptive financial innovators like FinTech companies. FinTech startups are going to disrupt 25-30% of the banking system’s value chain. This is what analysts say. But instead of sending the whole banking reality into chaos, there is real ground for cooperation between FinTech companies and banks.
Therefore, the question isn’t if these new disruptions will transform banking as they have already started doing so, but rather how to partner more successfully within the new financial ecosystem. The new strategy is partnership instead of competition.
What are the challenges?
Why do banks lag behind in terms of innovation? Generally speaking, there are two main reasons:
- Banks can’t really think like a tech company. They have processes and regulations that have been operating more or less “smoothly” for many years, and this routine has set a “trap” for them. Startups are much smarter and they bring in artificial intelligence, big data analysis and the mobile-first approach, so much appreciated by younger users, especially the Millennials.
- Banks aren’t flexible in the solutions they offer. Technology is changing the way services are delivered to end customers. In this respect, FinTech companies are decreasing risk and opening up new avenues to connect, offering users the kind of service they prefer. Increased choice in the industry will create winners and losers, and that means banks have to work hard, cooperating with disruptive FinTech companies to stay on top of the competition. Traditional institutions that survive this shift will be more agile and responsive.
Approaching the topic of partnership
What are the advantages of banks and what are the advantages of FinTech companies that can bring the two to work together?
- Broad existing customer base
- Broad product set
- Low cost of capital
- National Bank Act Protections
- Regulatory Compliance
- New ideas
- Agile implementation
- Cutting edge analytics
- Online customer acquisition
- Online/Mobile UX design
Frameworks to cooperate
In order to cooperate successfully, banks have to integrate the advantages FinTech offers into their processes, giving way to some innovation and a change in approaches.
- Banks have a huge amount of precedent, resources and tremendous influence in the regulatory frameworks. FinTech companies are able to innovate quickly and bring products for very specific client segments. When you combine those two together, you’re able to not only leverage the resources of the bank, but make use of the nimbleness of the FinTechs to bring the products to market very quickly, and determine which ones add value to the end users and the company. Those that do can be further innovated, while those that don’t can be left behind quickly.
- Banks can use their advantage in terms of financial stability in order to support FinTech startups. This gives the startups much-needed financial freedom to work on innovative, disruptive solutions, at the same time giving banks early exposure to startups’ emerging technologies.
- Banks can use the data from digital channels that FinTech companies offer. And it is the right data.
FinTech companies use data in a competitive way that banks still can’t come around and this is one edge for cooperation. FinTech has an open platform vs. bank’s close platform. The internet is open. The role of data overtime is not about ownership but about knowing the end users.
So, FinTech companies can offer the following:
- Greater consumer choice and freedom with solutions tailored to specific customer groups
- More flexibility in the service approaches
- Potential new business models that will make banks more competitive
- Serving underserved customers
- Offering real innovation in the form of differentiated products
These are the points for true partnership between the two drastically different players. Close, continuous communication is essential for any potential banking/FinTech relationship to work. Banks need real oversight and deep involvement. This means they don’t view FinTech innovation as some necessary “evil”, but are rather willing to work enthusiastically on mutual goals, taking them into the customer-friendly zone, something so necessary to stay competitive!
If you are interested in the latest tech innovations for banking and Financial Services industries and to meeting with top FinTech companies of Silicon Valley, attend “Navigating FinTech Disruption” Silicon Valley Immersion program for Financial Services executives.