“Innovation for customers has never had powerful brakes to shackle it and with the current momentum it will not get them now.”
Investment in developing new technology for financial services totalled $14bn in 2015. In recent decades, banking has made significant contributions to the innovation of its internal platforms with the objective of reducing costs. However, this new period of evolution is nothing like the placid development which preceded it. In addition to bank-led investments, there are also other investors who have detected an important business niche in an ever-closer future.
Other companies have appeared, lending money to their clients, investing capital in businesses and becoming equal or better in critical elements of the banking value chain offering. They may even force a degree of customer migration to other platforms offering greater convenience, as demonstrated by PayPal.
A key feature of the FinTech ecosystem is the sheer number of firms increasing the pressure on traditional banks across a broad range of products and solutions. In order to avoid death by a thousand cuts, Executives of the large global financial corporations have created investment platforms to identify and second resources into companies in the hope that they will reap greater future benefit from them. These Executives with their deep knowledge of the sector, know that something fundamental is happening.
Globally, national governments fought for years to house the powerful financial sector. The world now revolves around a handful of financial capitals with a concentration of the largest banks’ headquarters. The new battle being fought is to house the future of banking: the British government wants the UK to build the largest FinTech hub by 2020, adding 100,000 more employees to a sector which currently has 135,000.
The Monetary Authority of Singapore plans to invest $225 million in the next five years, so as not to miss out on the list of growing FinTech hubs which also features Silicon Valley, New York, Tel Aviv, Frankfurt and Hong Kong. Governments and regulators are no longer ignoring the possibilities of this sector. They understand that it needs support to force the required change on the banking industry, and as a result are injecting more fuel into a sector which some already believe is creating a speculative bubble.
Incumbent banks cannot ignore this push either; they must decide whether they want to compete, collaborate, or acquire new players in their industry. Innovation for customers has never had powerful brakes to shackle it, and with the current momentum it will not get them now. Some banks have started an internal revolution in this regard, aware that there is no turning back.
The appearance of FinTechs has obliged banks to rethink many things, including how to take the technological leap facing them. Do they use innovation developed in-house for financial services or back disruptive new ideas arising from talent born in other sectors? Do they acquire companies and their talent or to seek to establish collaborative ventures? Everyone will find their own way forward.
Individual innovation labs, purchases and partnerships are all, a priority, good strategy for facing the future. The decision will be influenced by the culture of each entity but, above all, they will have to analyse which model will bring about more benefits, less risks and better results.
One thing is clear, the disruptive force of innovation and change in banking has begun and shows no sign of fading.