Face the music

There are times when the power within a trend is not self-evident. It can appear to be a passing tremor in the status quo, rather than a movement or a development or a growing force that can possibly change not just how things are done but how the world perceives them. The impact of FinTechs on the financial services sector has been one such trend, catching some unaware, yet entrenching itself quickly and permanently within the sector.

If a trend comes and goes, then companies that foresaw its short life feel smart at having avoided investment in a fad. If it comes and stays and a company has failed to predict the emerging shift in values, focus and investment that other companies had responded to at the right time, then the outcome is less celebratory.

Ever heard the name Dick Rowe? There's a very good reason why you haven't [1]. "Guitar groups are on their way out, Mr Epstein", is his most famous utterance. He is the man who believed The Beatles would never make it. That's how wrong a misjudgement can go. Established financial services institutions are rapidly bringing FinTech approaches into the mainstream. No-one wants to be a footnote in history.

The impact of FinTechs

'FinTech' is the generic term applied to technology innovations in the finance sector. The innovations typically harness combinations of internet, mobile, big data, AI, IoT, machine learning, analytics, automation and design. They offer new tools and services, from payments and crowd-funding, to currency exchange, online lending and wealth management services. 

Older financial technology innovations, such as ATMs, telegraphic transfers and Automated Clearing Services, are not generally considered part of the FinTech revolution, although they were  transformative in their time.

Today FinTech is seen as more than just an improvement on the way business is done. It’s a new way of thinking – agile, smart and customer-focused – in contrast  to the slow and outmoded 'establishment' mind-set.

In the recent past the idea that the disruptive power of FinTech would bring the walls of traditional banking tumbling down was rarely out of the trade press or the blogosphere. Large established financial services brands are still here however, still employing hundreds of thousands of people, and still managing most financial transactions throughout the global economy every day. 

Disruption is not destruction

FinTech has been assimilated in the financial services sector culture.Technology is transforming the way people and companies connect with their banks, and the way banks manage their back office operations. FinTech ideas and approaches have been embraced. Traditional players no longer see them as  threats to their existence, but rather as sources of enlightenment. 

Peter Wong, Deputy Chairman and Chief Executive of HSBC says in an online article, FinTech an opportunity, not a threat to banking industry: “Big banks and FinTech startups have a great deal to offer each other. Banks have a large customer base, stable infrastructure, assets and regulatory know-how. Startups provide out of-the-box thinking, technical expertise, and agility to adapt quickly to change.” 

FinTech is now seen to represent fresh opportunities even if the companies behind these innovations are usually not large established financial services institutions but small, nimble, entrepreneurial start-ups.

Financial institutions, with their heritage and culture, their legacy systems and processes that have evolved over time, are under huge pressure to adapt to the digital age and the digital-savvy customer. Meeting these demands requires huge investment. At the same time, global financial regulation is becoming more complex, making compliance more costly and time-consuming.

For this reason, banks and FinTech firms are looking at how they can cooperate or co-innovate with, rather than compete with each other. They are coming to appreciate the mutual benefits of working together; the symbiosis of joint innovation.

Stonger together

The FinTech business model tends to focus on highly personalised, high quality services to niche markets, picking off customers from bigger incumbents and keeping operations lean to stay profitable. In the long term, the challenge for companies in this sphere will be to scale up without compromising the quality of the service, while most likely fending off increased competition as incumbents play catch-up and more new players come into the market.

Collaborating and partnering with incumbents provides start-ups with immediate access to larger markets, and cements their first-mover advantage to discourage new entrants. Customers, meanwhile, receive the innovative new services and the enhanced experiences that they’ve some to expect, while continuing to benefit from a relationship with an organisation they’ve come to trust.

There’s no doubt that with changing regulation, technology, demographics and customer expectations, the banking industry will look very different in a couple of years time. In all probability more collaboration is on its way in. Time for banks to realise that together with FinTechs, they can work it out.

[1] Although maybe you should have. After famously turning down The Beatles, Dick went on to sign The Rolling Stones, The Moody Blues, Van Morrison, Tom Jones, and The Small Faces among many others. Despite his later smart choices, his Wikipedia profile highlights him as "the man who did not sign The Beatles".