Fintech is reshaping the financial services industry. How can traditional banks respond to this creative disruption?
Fintech firms are organisations, start-ups and teams created with the distinct goal of disrupting incumbent financial systems and companies through the use of new software and technical expertise. Fintech solutions can replace existing processes or build new capabilities that will expand or bypass elements of the existing financial services ecosystem by providing services that are faster, more efficient and more customer-focused.
This tech-driven revolution has led to increased attention and, more significantly, investment in fintech firms on a global scale. There is little doubt that they are a force to be reckoned with – the UK alone attracted more than £350 million of fintech investment in 2015.
Against this backdrop, there is a growing imperative for the incumbent financial service companies to make a proactive choice. Which business model will they adopt to enable them to both defend and take advantage of the rise of fintech? There are a number of approaches being taken by incumbent companies in reaction to fintech emerging within the industry – we have outlined the five predominant business models below.
Cross-collaboration between traditional providers, fintech companies, new banks and external technology companies is becoming increasingly common. There are several examples of large firms partnering with fintech providers to bring apps and mobile banking to the consumer (Santander, for example, working with Startupbootcamp).
Coupled with the growing ‘API universe’ (a standardised set of routines and tools for linking and building software), this approach is leading to the prevalence of increasingly collaborative platforms and ways of working.
Often when an idea enters the public consciousness, all other parties in an industry clamour to get on board, and the financial services industry is no exception. A popular example in this context is mobile payments – bPay, Apple Pay and Android Pay – all forms of fintech advancements. Furthermore, these ideas can displace part of the traditional value chain, disrupting the industry and becoming new ‘best practice’ and the market leader. This then leads to imitation from other firms.
Staying one step ahead of new entrants requires traditional players to bring innovative ideas to the table before fintech start-ups. This is often possible by leveraging an existing customer base or via access to resources that are constrained for start-ups. For example, many major financial institutions, including Lloyds Banking Group and the Royal Bank of Scotland, have their own ‘innovation labs’, which allow them to rapidly experiment with radical ideas and leverage on existing data and information
One of the classic ways to enter a market, and indeed something at the heart of the start-up model is venture investing. By investing in fintech, firms gain skills, expertise, technology and market share.
BBVA, for example, has been involved in building a fintech portfolio by performing a number of acquisitions internationally, including: Holvi, a Helsinki-based online-only business bank, for approximately $100 million; Simple, a US banking start-up, for $117 million; and a portion of Atom, a UK based online-only bank, for $67 million. This appears to be a canny response to select a series of the best-of-breed players with the eventual ability of linking them together to build their own ecosystem of innovative financial services with an international footprint.
The financial services industry is moving from a ‘one bank for all purposes’ model to a much more focused one, with an increase in companies focusing on specific parts of the supply chain (payments, current accounts or back office services, for example). There are still opportunities for companies to divest parts of the supply chain that they don’t feel fit with their future core business.
The rise of the fintech industry can be viewed as either a threat or an opportunity by the incumbent financial services players. Irrespective of viewpoint, they should be taking the time now to establish a clear strategy of deliberate engagement.
Success will require a strategic response by proactively choosing a business model, or more likely, a combination of them. By engaging with the fintech industry in a way that future-proofs their core propositions, operating model and digital strategy, financial services can adapt and take advantage of innovation. Those that make the mistake of not addressing this seismic shift in the industry are likely to find their ability to influence this choice entirely eroded.
Words: Neil Furnivall, Nathalie Ennis and Simon Wang