Meet­ing the Fin­tech Chal­lenge

Rotman Management Magazine - - NEWS -

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

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