Banks and Fintech in the US
While financial services may be slow to go through the same transformative technology changes as other industries, there are about 4,000 fintech firms looking to innovate this highly regulated industry. Andrea Murad reports.
Whether fintech firms are focused on creating a different customer experience or developing efficiencies within the businesses, every sector is ripe for change. While these start-ups introduce many innovations, fintech firms take the lead from other industries.
“You want to have experiences that you get from other environments,” says Robert Gach, managing director for Capital Markets at Accenture Strategy, “and even on the institution side, as products and services become more digitised and digital, we refer to it as the ‘consumerisation’ of even the institution base.”
To compete in any industry, a company has to be as innovative as its competition, and innovation at banks has been on overdrive for the past few years. “Fintechs are yet to take large share of revenue or fee income from the banks, but they are prompting banks to look at digitising their businesses to compete both with the traditional players and fintechs,” says Senthil Kumar, vice president for Oracle Financial Services.
The financial services industry is also getting pressure from its customers, both retail and institutional, because customers want a different experience. They want transactions to be efficient and fast. “Changing customer expectation, competition from non-banks like telcos, retailers and fintechs and the increased regulatory oversight has driven banks to re-think how they are wired internally,” says Senthil.
Why is fintech important?
Adopting fintech is more than buying software. It’s transforming how banks distribute, build, operate and manage their business. “If banks ignore fintech, they’ll miss out on a very important opportunity to have products and services delivered to customers,” says Robert.
Perhaps fintech won’t be as disruptive as Napster was to the music industry or Craigslist Inc. was to the media industry, but people do expect fintech to make significant changes to how financial service firms conduct their businesses in the future.
What’s driving the innovation?
The hardware and software to build out an idea that cost about $5 million five years ago now costs about $5,000, according to CB Insights. Barriers to change have dropped significantly, making it cheaper to meet the customer demand for a different type of service and easier to turn an idea into reality.
“The expectation of the consumers, the lowering price point to innovate and the increase in the capability of technology itself have created an explosion that you can see in the level of investments going into fintech over the last two years,” says Robert.
As fintech and innovation becomes more of a priority for banks, there’s been more funding for these companies. “The first five months of 2016, we have seen grow 2.16 times when compared to the same period last year,” says Senthil. This funding has allowed certain aspects of financial services to make definitive changes to business models.
“Many of the players in the lending, remittances and payments space are now matured players with presence across multiple regions and of a size that banks cannot ignore them,” says Senthil. “These companies have a very different DNA.”
Why is fintech a priority?
Customers want to interact with their banks differently, and they want the same types of experiences with banks that they have with other industries.
They want to complete a transaction instantaneously with only a few clicks of a mouse or swipes of their finger. Brands need to have a sharp and narrow focus as they work to build scale and efficiency and create a better customer experience.
Do banks buy fintech firms, partner with them or innovate on their own?
“Banks have realised that by being a fast follower, they could possibly miss a significant market opportunity and whole generation of technology change,” says Senthil. “Partnerships are very evident and visible between the banks and the fintechs in the market.”
Because of cost pressures, banks aren’t able to invest in these firms since they have to spend on risk, regulation and compliance. As a result, there’s been an explosion of entrepreneurs within fintech that’s funded primarily through venture capital. More than half of the investments are focused on collaborative ideas where fintech firms team with banks.
“That’s very powerful,” says Robert, “and the banks have good ideas, but half the ideas are coming from outside.” Rather than compete with banks, fintechs provide the oxygen and capabilities to help banks create a new ecosystem.
Financial institutions don’t just rely on fintech firms. Many also do their own work in house, and they are able to change their businesses by having their own labs, making investments and collaborating with others. Innovation labs are a big part of fintech, and there are labs that are formed in partnership with firms in the technology and financial service spaces. “All this is enabling them to be first mover and not a fast follower,” says Senthil.
Why are banks collaborating with each other?
While a proprietary trading algorithm is very competitive, banks recognise the value in collaboration, particularly when it comes to cyber security, infrastructure and mobile platforms, for example. While banks have their own incubators and investment funds, they still participate in industry forums to get insight from others. “It’s a balance,” says Robert. “If you’re doing it in a vacuum, you’re missing the dialog and participation.”
Where will we see innovation next?
Companies are looking at all elements of the market because whether it’s front office, technology, people or operations, everything’s up for grabs. Within the trading and institutional markets, for example, LMRKTS LLC helps banks reduce risk in a derivatives portfolio by consolidating capital charges, while Syndicated Loan Direct parses through and summarises legal documents to help people evaluate and process the risk.
Firms like these provide efficiencies that result in cost savings for banks, and the fintech firms are focused on changing a bank’s operations rather than creating a new customer experience.