New companies are disrupting banks and financial business
It’s taken long enough, but the majority of banks have now realised the importance of FinTech’s disruptive potential. In their Global FinTech Report 2017, PwC found that 88% of global banks are worried about losing revenue to FinTech companies, and it’s not difficult to see why. Challenger banks and financial companies are capturing the notoriously difficult millennial market with cheaper, faster services that aren’t tethered to the complicated infrastructure and regulations of big banks. As testament to this, FinTech received venture capital funding of $19 billion in 2015 alone. In response to the challenge from FinTech, 82% of banks are pursuing the same strategy – forge partnerships with innovative companies to stay relevant in the industry. This is a huge breakthrough for financial technology as a whole, and could provide opportunities for young companies looking to get a foot in the door. However, now that the vast majority of banks are investing in FinTech, how will this disrupt finance?
How have banks responded to the rise of FinTech?
Disruption in finance has not gone unnoticed by established banking companies. The vast majority of banks have responded to customer demand by increasingly online services and streamlining processes. According to PwC’s report, banks are most worried about losses in payments, fund transfers and personal finance. Coupled with increasing VC investment in FinTech, it’s easy to see why they are so keen to partner up with competitors. In other words, if you can’t beat them, join them.
Whilst joining forces with FinTech startups appears to be the preferred strategy, there are other ways that banks have responded to changes in the industry. For example, in 2016, funding in blockchain technologies rose by 79% to reach $450 million. On top of changes in internal software, global banks have built physical innovation hubs. As well as working with U.S. FinTech startup Kabbage, Canada’s Scotiabank has created a new Digital Factory to house 350 developers, designers, engineers and data scientists to serve their 23 million customers. Similarly, the Royal Bank of Canada has set up their own Innovation Centre in Silicon Valley. Surviving the threat from FinTech is about adapting, and these examples show that banks are prepared to do exactly that. Jeff Marshall, the head of Scotiabank’s Digital Factory, summed up this attitude by stating, “For us to be competitive, we need to invest in technology, and in particular, around a digital transformation of the bank.”
Disruption in finance
Now that traditional banks have recognised the need to cooperate with FinTech companies, the financial sector is set to change yet again. Adopting financial technology will improve digital services both in terms of customer experience and the administration of the banks themselves. FinTech largely offers positive transformation in the form of cheap, accessible, personal financial services – without the hindrances of big banks. It looks clear that the financial sector will benefit from disruption, but all companies will need to prepare for these changes. One hugely important consideration is protecting data in the face of cybersecurity issues. Integration is also much easier said than done. Successful partnerships are stalled by clashes in management and culture, uncertainty over regulations, and the limits of legacy technology. And whilst 82% of the survey participants stated that they would begin working with FinTech companies, their true commitment to this strategy remains to be seen.
It’s also worth considering that a number of FinTech startups don’t want to be integrated into existing banking models – they want to change them entirely. For instance, Wealthsimple, Wealthbar and Nestwealth are three companies which aim to completely replace human financial planners with automated management. In future, established banking firms need to convince their challengers that they are relevant, useful partners.
Speaking 25 years ago, Bill Gates stated that retail banks were ‘dinosaurs’ that would be bypassed by financial technology. However, they’re still very much alive and kicking. The Global FinTech Report 2017 shows that the majority of established banks are now well aware of the impact of FinTech, and want to take advantage of it. The merging of innovative startups and legacy companies is set to become a massively disruptive trend in finance, and will transform the sector. However, traditional banks will have to work hard to co-operate with the management style and infrastructures of young FinTech companies – the first step is proving that they can adapt to facilitate industry changes.
Has your business benefited from FinTech? Are partnerships with FinTech companies the most effective strategy to survive industry transformation? Can traditional banks remain relevant in the changing sector? Share your thoughts and opinions.