Finance growth

Fintech disrupters: time for the big bang moment?

Atul Monga Atul Monga

Traditional banks have largely ignored the rise of fintech companies disrupting the sector. But are the two worlds about to finally collide?

It is nearly 20 years ago that the idea of the branchless-bank was first conceived, although the true impact is only beginning to hit home now. What is even more ironic is that the idea (Egg, for those of you who are old enough to remember) came out of a leading insurer, and the sector as a whole in itself has been slow to climb on to the fintech bandwagon.

One could argue that it has taken us, as users, a long time to change our habits, or at least that is what traditional high street banks would want us to believe. In fact, little change occurred in those 20 years until the last two to three years.

The rise of fintech

Established high street banks largely ignored the threat from more recent ‘challenger’ banks given the latter’s focus on SMEs, without significantly challenging either their retail or their ‘large’ corporate heartlands.

The new breed of fintech disrupters on the other hand focused on and begun to seriously impact the heartlands of both – retail and SME. They’ve done this primarily through functionality and/or nimbleness, often in partnerships with non-financial entities.

Kabbage in the US and Funding Circle and MarketInvoice in the UK tied up with Sage, combining payments with small business loans. Azimo, through various tie-ups now offers its retail customers the ability to remit cash to other countries for collection via bank accounts, cash pick-up, home delivery and mobile wallets.

To date banks have been doing their part in the fintech ‘revolution’ by sponsoring hackathons, participating in incubators and accelerators, taking minority stakes in new-age lenders as a safety mechanism - creating a 'right of first refusal' when the model is tested and scaled. But is this enough?

Is it all change in the banking sector?

Mainstream banks to some extent continue to 'bank' on several factors for the prevalence of their existing models.

On the demand side, they have access to large client bases and their stickiness, as well as the perseverance of the ‘physical cash’ economy. While cash is here to stay, at least for now, the former may be about to change soon.  

On the supply side, they have made huge investments in infrastructure (technology, people and branches) and disrupting this will be like the proverbial vote. Then there is the cost of upgrading legacy technology to meet the demands of an increasingly sophisticated customer.

The risk for banks is also that the large social media or technology giants could disrupt banking in such a way that it may be too late for them to respond. They have access to the masses and, better still, have the ability to seek and gain quick adoption given the 'network' nature of their business model.

Already some of them are big investors in new and upcoming disruptors – Ripple, OnDeck – or are hiring banking professionals to work out the best way to address the inefficiencies of traditional banking.

The impact of market uncertainty on banks

Pronounced uncertainty in the market could compel banks to change their thinking as cost pressures and lower interest rates start to impact, to consider adopting newer ways of doing business, making these the new ‘mainstream’.

A few banks may change aspects of their business or even set-up new subsidiaries à la Low Cost Carrier (LCC) model as in the airline industry, notwithstanding the fact that very few full-service carriers in the airline industry have managed to make parallel business models succeed.

Others will seek a rethink on every aspect of doing business altogether. This could have the potential to expedite transaction activity in the disrupter/enabler space of a magnitude not seen before.

Not unsurprisingly, fintech businesses that are most likely to be attractive to banks and financial institutions are ones with proven technology, brand, scale, geographic coverage.

However, a key ingredient will be the ability to operate as a captive – operationally as well as culturally – to maximise the advantage from access to a large client base and demonstrate clearly the net benefit of the shift in revenue model.