Some, launched to mitigate future risks associated with a similar crisis; others, as a way to create more trust and transparency in a profitable, and yet, still opaque industry. Up until then, there had been calls for some sort of change, but not much had happened. That is, until the dawn of FinTech, a digital revolution and disruption at the cross-section of technology, finance and creativity began to redefine, and transform the role of financial institutions. It introduced new types of currencies, transactions, infrastructure, and other seemingly better, faster and lower-cost products and services, while inverting traditional models.
At the UK’s largest meeting for the Fintech community in London last week, it was clear that there has been a successful paradigm shift, with a significant growth in the number of players and capital invested in FinTech, targeting the most profitable areas of global banking. From a rather modest $2 billion in 2010 to almost $20 billion in 2015, there is little doubt about investors’ intentions, and that FinTech startups are booming. Globally, it is estimated that over 1,000 companies, boasting $105 billion in funding and $870 billion in market capitalization, are now engaged in FinTech activities, unleashing trends in digital payments, crowdfunding, robo-advisory and blockchain development.
Today, the key question is whether FinTech is innovative enough to disrupt a lucrative legacy industry.
The high cost of legacy banking, under pressure to keep costs down whilst optimising revenues, has prompted many to review their operations taking a leaf from companies like Uber and Airbnb which seamlessly connect buyers and sellers to grow revenues exponentially while keeping costs more or less flat. This strategic shift has not gone unnoticed by innovators in financial services. As people, businesses and their devices become more interconnected, new streams of real-time communications are emerging, and with them innovators who use that data to support their decision-making.
In short, the financial services sector, like many before it, is being transformed by technology, digitalised for the needs of the 21st century. What will transpire is an improved service offering, better tailored to today’s customers needs, offering cheaper and faster customer acquisition. A more efficient industry will lead to higher margins and client retention. From this perspective it seems that FinTechs are driving other actors to collaborate and share their knowledge, inevitably creating a more sustainable financial industry model.
Driving Excellence in Disruption
As a result, FinTech and disruption have become synonymous. From cross-border currency transactions to peer-to-peer lending, Fintech firms are harnessing the sharing economy and growing connectedness of customers as they continue to challenge the status-quo in Financial Services. To improve accessibility and cost effectiveness, established firms need to understand these trends, and their potential impact in a rapidly changing world. Over the last few years, it’s become clear that consumer expectations are changing significantly. For example, a growing number of customers are insisting that banks provide easy, convenient and easily accessible services, anywhere, anytime.
Addressing Opportunities and Challenges
To flourish, the FinTech Revolution will need to keep legal and regulatory requirements in check. Whilst new and innovative services are being created to challenge the existing financial services market, a balanced interface ensures that collaboration is as important as competition between incumbents and challengers. Established players may have the advantage of brand and the experience of operating at scale in highly regulated markets; but their smaller start-up counterparts can innovate at a faster pace that is quite difficult for large organisations, with legacy systems and infrastructure.
The opportunities and challenges for both are clear. For start-ups in particular, the challenges can be many. Aside from the risks associated with high set-up costs and burn rate, the requirements of stringent regulatory authorisation, implementation and compliance can be daunting. The volume and breadth of financial regulation has increased over the last few years, and not just on the operation of capital markets and investment baking, but in retail and SME services. As such, a focus on governance and personal accountability driven by an aggressive enforcement regime raises the stakes where potential breaches are identified.
Managing Risks and Expectations
It should come as no surprise therefore that having grown exponentially over the last few years, FinTech is enabling traditional firms to disrupt themselves. However, many risks abound in transforming from ‘legacy-to-innovator’. As an example, a cheaper alternative to lengthy, costly and risky legacy systems is CapGemini’s Connected Banking Solution which represents a revolutionary step forward in providing banking services throughout the value chain, hosted on AWS cloud platform. To ascertain its level of exposure, a firm must implement a robust risk assessment model, taking into account among others, regulations and solvency of third party service providers. A risk model may be costly, but it offers assurance, stability and knowledge retention with regards to the development of in-house applications and back-up systems.
FinTechs may not be the only challenge that could face traditional companies, making it even more imperative that they develop a strong foundation in innovation. ‘BigTech’ firms, such as social media, e-commerce and telecoms, pose a potentially bigger disruptive force since they have powerful data processing capabilities, deep and long-standing relationships, with none of the challenges FinTechs face in winning over customer trust. Thus, to stay in the game, traditional firms may be reduced to merely providing back-office processing services and support to the innovators who would own the front-end client relationships.
Even then, they would need to deploy nimble mid and back-end office solutions capable of rapid evolution, to stay competitive. Otherwise, financial institutions bogged down with inflexible legacy infrastructure would fall short of achieving the agility they need, and continue to experience costly operational efficiencies. In the long run, a shift to automated operations is inevitable. Though less emotionally rewarding, it would offer a far superior and profitable customer experience.
A Silver Lining for the Fintech Ecosystem
As FinTech emerges from the peripherals, the possibilities for the global economy are limitless, offering a sliver lining. Today, consumers and businesses alike seek unique solutions. Relentless competition and globalisation indicate that this industry will continue to grow at rapid speeds. Perhaps, what started as hype now has the capacity to forever change the way we think and communicate about sustainability.
The Age of FinTech, be it disruptive or innovative, is shaping a whole new world that demands more efficiency. It presents a clear opportunity to modernise, internationalise and democratise financial services. To optimise these prospects will require a continuous iteration process offering intelligent analytics, consumer insights and intuitive communication supported by broad-based stakeholder engagement.