The FinTech Age
The World Bank maintains that the great emergence of financial service focused technological companies (FinTechs) came about due to the global crisis of 2007. The banking regulatory framework was strengthened and traditional sources of finance became scarcer and pricier. At that time, we were on the cusp of an intense process of “en-screening” caused by the digital avalanche; that is essentially, the conversion of any screen, from that of a smartphone to a control panel in a car, to becoming a potential shop window for a bank.
Since then, change has been constant. FinTechs are no longer the only companies able to create new solutions which attract clients who are disillusioned with traditional banking. A large number of small businesses have emerged to cover the entire spectrum of the financial services value chain. While some of these offer solutions directed at end clients (B2C), others are focusing on the development of technology for the sector as a whole (B2B). All have been pursuing a data-driven, customer-centric approach which the sector sorely needed. In the UK, the government’s drive for increased competition in what it saw as a monopoly for the ‘big 5’ High Street banks, has further accelerated this move.
Although some Executives in the sector believe that, at least for the time being, FinTechs won’t be able to offer a full service platform for banking products, they know that FinTechs are beginning to play a lead role in improving customer experience for existing products and could potentially disintermediate the relationship between traditional banks and their customers. Ownership of the customer relationship is the source of fierce industry competition. If they want to compete, traditional banks need to evolve their business models.
There is a consensus amongst analysts about the differing speeds at which the evolution of traditional banks and advances of FinTechs will occur – the former are laden with heavy ‘technology debts’ and inherent aversion to risk, limiting the pace of change. Audacious start-ups on the other hand, are free of technology debt and are capable of quickly developing, deploying and refining their technology with successful results. They also have the benefit of avoiding many of the regulatory pressures to which traditional financial entities are subject, although it is precisely this lack of experience with the regulators which could prove to be a hindrance in the long-term.
It does take time for a complete paradigm shift to take effect. The FinTech sector still has its limitations: its consumer base is narrow, its youth, lack of experience and lack of proven financial results do not instil confidence among potential partners. In addition, products are not highly diversified, and there is a dearth of experience in risk management. However, as more investment flows into FinTechs, and as technology develops, they will go from strength to strength and ultimately we will see FinTechs pervasively change the financial sector.