Moving ahead in Fintech landscape-A Ready reckoner for CFOs

In my last post I outlined the emerging role of Fintechs and what CFOs need to be cognizant of while operating in a marketplace influenced by Fintechs. Needless to say, the role of CFOs have become critical in light of the changing environment pervaded by technology shifts and emergence of new age players. It is necessary to check their awareness, analysis and also the actions initiated for operating in the Fintech environment.

Awareness:

Of primary importance is the need to understand the awareness of key stakeholders in the bank across the following dimensions:-

1. Business model challenge: Retail banking organizations have witnessed a change in business model to being displaced, diminished and disintermediated. The core operating function of the bank has been challenged by emergence of new technology and organizations that are able to utilize these technologies to offer better customer experience and lower costs. This has put the banking model under pressure and  further moved day to day transactions from banking interfaces to new age players.
2. Competitor landscape: A survey by The Financial Brand indicates that, on an average, over 50% of senior execs in banks are not aware of the new entrants in financial services space like Azimo, Transferwise, Lending Club, PayPal etc. with the percentage going up to 78% in few cases.
3. Heightened levels of investment: Global investment in Fintech currently stands at a staggering $49.7 billion. From 2010 to 2015, the largest amount of investments had been received by the USA, UK & Ireland, Europe, China, and India. Investment has more than tripled over the last few years, jumping from $4 billion in 2013 to $12 billion in 2014. (source: nordicstartupbits.com)
4. The governmental support for Fintechs is high with most governments providing incentives in the form of tax concessions, financial support etc. Few central banks in developed countries like UK and USA have established dedicated functions to understand Fintech landscape.
5. The top business focus areas pursued by Fintechs include finance and lending, processing and payments, mobile wallet, authentication and remittance.

Analysis

CFOs need to evaluate if the analysis of Fintechs that they are carrying out takes into account the following information.

1. Factors that influence use of Fintech: Based on few surveys, it has been found that most of the users claim ease of access as the primary reason for accessing Fintech followed by lower rates. There are other influencing factors like wide range of products, better online experience and trust as well.
   1. Hedging done by various players: Some banks have taken the lead to invest in various Fintechs- the names include Wells Fargo, Bank of America Merrill Lynch, Lloyds, Santander and Societe General.
   2. Partnerships: Many banks have followed the alternate route of partnering with Fintechs and accordingly, enhancing their portfolio. Examples include -
   3. The Royal Bank of Scotland has already set the ball rolling in this direction by partnering with Funding Circle and Assetz Capital. They have an agreement to refer their customers to the platforms provided by the two Fintechs. Customers would then have the choice to access Fintech platforms to source their funds. On giving access to Fintech, customers would be benefited with lower rate of interest and fees, and their loans get sanctioned quickly compared to traditional method.
   4. Titan Bank and Congressional Bank in the US are tied up with the Lending Club platform. Titan Bank will also offer personal loans to their banking customers through the Lending Club platform.
   5. Great Britain’s first P2P lender Zopa has teamed up with Metro Bank to combine P2P lending with “high street banking.” This deal is unique and makes Metro Bank the first bank in Great Britain to lend via a P2P platform.

Action:

It would be good to have a ranking mechanism that takes into account multiple areas. One of the frameworks that can be adopted includes

• Listing focus areas like remittance, lending, payments, wealth management and non-banking services to name a few.
• The 4 focus areas listed above can be ranked across activity stages like evaluation, making changes to existing systems, investment, partnership and spinning off to a sub-business line.

Conclusion:

The three streams outlined above – awareness, analysis and action, can be scored on a 5 point scale as given below to evaluate the effectiveness of the bank in operating in the Fintech landscape.

On a 5 point scale, for Awareness and Analysis give a score as follows:

• 5- if 75% of the stakeholders are familiar with 75% of the elements;
• 4- if 50% of the stakeholders are familiar with 75% of the elements;
• 3- if 50% of the stakeholders are familiar with above 50% of the elements
• 2- If 35% of the stakeholders are familiar with above 50% of the elements
• 1 - In other cases

On the action front, score as follows:

• 5- if 50% of the activity is turned in to a sub business line
• 4- if 50% of the activity has one or more partnerships/investment with the Unicorn Fintech
• 3-if 50% of the activity you are making changes to your existing system
• 2 - If 35% of the activity you are making changes to your existing system
• 1 - In other cases

The scoring outlined above is only an indication to understand what stage of maturity the financial executive of a bank is at, while moving forward in the Fintech landscape. A higher number of 5s and 4s indicate a higher degree of preparedness when compared to other banks. CFOs would do well to move towards that objective.