Meeting the Fintech Challenge
A few years ago, a group of seemingly-modest startups began offering consumers limited online lending or retail-payment services. These ‘fintechs’ operated in the margins and didn’t pose an obvious threat to established financial-services companies.
Today, fintechs are rapidly entering the mainstream. Some startups, like have become household names. And more established tech companies, including and
have also begun to offer fintech applications. Each delivers (or plans to deliver) highly focused financial-services applications, often more effectively and less expensively than traditional companies. They have been attracting customers in larger numbers, leaving incumbent financial-services firms with no choice but to take notice.
In such fields as online lending, money transfer and credit ratings, fintech companies are breaking the dominance of financial services’ largest players in novel ways. Some, for example, are developing next-generation ‘robo-advisors’ that better design savings solutions on the basis of goals and risk appetite, without a bias toward any particular product. One fintech innovator has engineered a new method for capturing and sifting data to spot fraud and monitor trading activity — a formula it had originally designed for medical cancer screening.
In a sign of just how significant fintech has become, global funding of these startups in the first three quarters of 2015 reached US$11.2 billion, nearly double the funding of the full year before, according to CB Insights.
So far, most incumbent financial institutions have responded to the fintech challenge in one of three ways. The first group has adopted a ‘wait-and-see’ approach, conserving resources until clear winners emerge. These firms risk being caught unprepared when the threat to their business becomes more imminent. The second group has acquired fintech firms to gain access to new technologies. But they have often had trouble with integration. The third group includes companies investing significant time and money in fixing their own existing IT landscape, which is typically fragmented and complicated by legacy systems that are hard to maintain and upgrade.
Many of these institutions hope to replicate fintech’s approach internally by establishing innovative, agile teams to develop new offerings rapidly, with an emphasis on digital features, such as mobile, social media and data analytics. But these internal teams are saddled with decades-old infrastructure, regulatory burdens and entrenched interests. Although earmarking more funds for IT improvements is a constructive activity for most organizations, it pales as a response to the emergence of fintech. It’s difficult for firmly rooted IT departments to be as agile as fintech startups.
If you are a financial-services executive, you may be wary — and rightfully so — of all these tactics. There is, fortunately, one more strategy you can employ that will borrow certain useful aspects of these approaches while putting your company in a better position to succeed: reorient your firm as the dynamic centre of a fintech ecosystem.
Instead of managing the entire customer experience through your bank’s legacy systems and processes, you should make the most of your position of trust with your customers, your access to customer data, and your knowledge of the regulatory environment. Explore the financial technologies around you, with an eye to finding