FinTechs have been reshaping the Financial Services industry for almost a decade. An ever increasing number of start-ups offer new solutions in a wide range of areas, from alternative payment solutions to peer-to-peer lending and crowdfunding. Global Fintech investment has been on the rise; the sector attracted US$22BN in 2015, as much as in the previous 4 years combined. FinTechs are raising eyebrows among incumbents, with differing views on what their emergence means to the industry.
The Fear of FinTechs
Today, it would be difficult to find a segment in the Financial Services industry untouched by the FinTech revolution. Having said that, some areas are more affected than others, with banking among the sectors where disruption is most imminent. Although FinTechs are not threatening the status of traditional banks yet, they increasingly view FinTechs as a potential threat to their business. According to a recent survey conducted by PwC, three out of four banking executives believe that part of their business is under threat. Banks fear that as a result of new FinTechs entering the market, they will lose market share and/or will have to forgo their margins. This is a valid concern, given that newly formed FinTechs are typically more agile and efficient than incumbent banks. Another advantage of FinTechs stems from the fact that their services often target a narrow segment or challenge a single banking product. Due to their specific focus, FinTechs’ services are more customer-oriented – these newly developed solutions are easy, quick and convenient to use, utilizing alternative channels such as mobile apps and social media. Inevitably, these new products also raise expectations towards traditional banking services to become more user-friendly; however, as banks typically organise their service offerings around a product or a channel, they’ve found refocusing services on the customer rather difficult.
Is Cooperation the Solution?
In order to keep up with customers’ raised standards, banks are increasingly partnering with FinTechs to improve their service offerings; according to a recent report by PwC, two in five banks already work with FinTechs in order to improve operations and customer experience, especially in areas where solutions can be easily integrated into their systems. Banks are also acknowledging the need to provide alternative access to their services, including digital and virtual channels. Based on research by Kaspersky Lab, one in three companies globally use mobile applications for business banking and B2B transactions. If banks are to satisfy their customers’ changing expectations, they will have to overcome security and regulatory issues, as well as disparities in company culture and management and work together with FinTechs to improve their services. The conditions for cooperation between the parties are there; banks possess the funds, logistics and the customer base, while FinTechs bring innovation and technical expertise to the table. Combining forces with FinTechs could help banks improve customer experience, lower operating costs and improve revenues; a recent report by UBS suggests that collaboration with FinTechs will help raise bank earnings by 3.8% over the next three years.
Despite the emergence of FinTech being viewed as a risk by most banks, there is potential for incumbents in partnering with the right FinTechs to leverage both parties’ strengths. Finding the optimum between collaboration and competition is difficult, but could eventually benefit both parties.