The FinTech effect and the disruption of financial services
The Fourth Industrial Revolution brought the convergence of the physical and cybernetic worlds, and the digital technologies that came along with it have created new paths of innovation that have disrupted the once known as the most traditional business model: the financial services industry. Will banks and financial institutions survive the arise of the FinTech era?
As the World stands on the brink of a technological revolution that will fundamentally alter the way everyone lives, works and relates to each other, it will be possible to observe the complete disruption of many industries and their business models. In its scale, scope, and complexity, the transformation will be unlike anything humankind or business has ever experienced before. For now, it is yet too soon to understand know just how it will unfold, but one thing is clear: the response to it must be integrated and comprehensive, involving all sectors of the industry and markets.
Every Industrial Revolution had a very significant impact on the demand and supply relation, but it is important to realize that there are three facts that explain why this current transformations the World is going through represent not merely a prolongation of the Third Industrial Revolution but rather the dawn of a Fourth and completely different one: speed, scope, and systems impact. The speed that current breakthroughs have has never been seen or experienced in history, and when compared with previous industrial revolutions, the Fourth is evolving at an exponential rather than a linear pace. Moreover, it is disrupting almost every industry and every sector in every country. The breadth and depth of these changes herald the transformation of entire systems of production, management, and governance. The possibilities of billions of people connected by mobile devices, with unprecedented processing power, storage capacity, and access to knowledge, are unlimited, and these will be multiplied by emerging technology breakthroughs in fields such as artificial intelligence, robotics, the Internet of Things, 3D printing, nanotechnology, biotechnology, materials science, energy storage, and quantum computing.
No wonder about the great benefits that such transformation can bring to companies and people, still, an underlying theme on the tables of global CEOs and senior business executives is that such acceleration of innovation and the speed of disruption are hard to understand and to anticipate, even for the best connected and most well informed companies. Indeed, across all industries, there is clear evidence that the technologies that underpin the Fourth Industrial Revolution are having a major impact on businesses, but none of the industries in the market have been experiencing so much disruption as banks and financial Institutions.
It becomes clear much of the reasons why banking is being largely disrupted when we take a deep-dive and understand that a bank’s true business is information exchange management, it becomes quite clear that, by having new forms, regulations and behaviors on how people and companies exchange, trade and consume information, this segment would be more vulnerable to a large disruption of its business model. The graphic below shows a perspective on what is happening:
The Fourth Industrial Revolutions is bringing significant changes on the ways people and companies relate. On the supply side, many industries are seeing the introduction of new technologies that create entirely new ways of serving existing needs and significantly disrupt existing industry value chains by improving the quality, speed, or price at which value is delivered. On the demand side are also occurring, as growing transparency, consumer engagement, and new patterns of consumer behavior (increasingly built upon access to mobile networks and data) force companies to adapt the way they design, market, and deliver products and services. A key trend is the development of technology-enabled platforms that combine both demand and supply to disrupt existing industry structures, such as those we see within the “sharing” or “on demand” economy. These technology platforms, rendered easy to use by the smartphone, convene people, assets, and data, thus creating entirely new ways of consuming goods and services in the process. In addition, they lower the barriers for businesses and individuals to create wealth, altering the personal and professional environments of workers. These new platform businesses are rapidly multiplying into many new services, ranging from laundry to shopping, from chores to parking, from massages to travel, and the financial services industry is no more an exception.
The digital revolution is transforming the behavior of customers when they access financial products and services. It’s known that the sector has experienced a certain degree of change in recent years, but the constant penetration of technology-driven applications in nearly every segment of financial services is something new. At the intersection of finance and technology lies this amazing phenomenon, which has been accelerating the pace of change at a remarkable rate and is reshaping the industry’s status quo, called FinTech.
FinTech is a quite dynamic segment right at the intersection of the financial services and technology sectors where technology-focused startups and new market entrants innovate the products and services currently provided by the traditional and once untouchable financial services industry. FinTech is gaining significant momentum and causing disruption to the traditional value chain of financial institutions and to the economic scenario in many Countries and markets. Cutting-edge FinTech companies and new market activities are redrawing the competitive landscape, blurring the lines that once defined players in the financial services and banking industry. The graphic below show a bit of the complexity of the FinTech ecosystem:
Besides having one of the most complexes ecosystems, where traditional banks are failing, FinTechs are succeding. As clients are becoming used to the digital experience offered by companies such as Google, Amazon, Facebook and Apple, they expect the same level of customer experience from their financial services providers. FinTech is riding the waves of disruption with solutions that can better address customer needs by offering enhanced accessibility, convenience and tailored products. In this context, the pursuit of customer centricity has become a main priority and it will help to meet the needs of digital native clientele. Over the next decade, the average financial services consumer profile will change dramatically as the Baby Boomer generation ages and Generations X and Y assume more significant roles in the global economy. The latter group, also known as “Millennials” (those born between 1980 and 2000), is bringing radical shifts to client demographics, behaviors and expectations. Its preference for a state-of-the-art customer experience, speed and convenience will further accelerate the adoption of FinTech solutions. Millennials seem to be bringing a higher degree of customer centricity to the entire financial system, a shift that is being crystallised in the DNA of FinTech companies. It’s safe to say that the most important impact FinTech will have on segment is an increased focus on the customer. So, it’s possible to say that FinTech is chomping at the fingers, as shown on the graphic below with some real examples:
Simply put, new technology is making the average person’s life. A recent survey on this why consumers adopt FinTech solutions done by Dealsunny reveals that about 44 percent of those who have adopted modern FinTech solutions, do so simply due to how easy it is to get started. All that is needed is to enter an email address or download an app, and that is about everything that is necessary to set up an account. Long gone are the days of standing in a line at the bank and filling out piles of paperwork to access any type of financial service.
Other 15 percent have switched to modern FinTech because of more attractive rates and fees. Of course cheaper services will naturally attract an audience, and this isn’t just true for consumers. Retailers for example are now more than happy to accept payment in cryptocurrencies (Bitcoin or Altcoin) because the cost to process the payment through services like Bitpay is actually less than the 3% transaction fee for a credit card. This is just one of many examples of how new technologies are allowing people to do business, save money and, more impressively, with higher quality. Other 13 percent of FinTech adopters say they like the wide access to different products and services offered. A few years ago, many products and services were confusing and expensive for the average person to access and hire them, but today anyone who has a mobile device can manage their assets, lend & borrow, invest, and play the markets, while getting high quality and information anywhere and anytime. The crux of innovation is doing far better than the existing established solutions, and that’s what the market is currently witnessing. Below follows a chart that shows more details of this referred survey and the main reasons why consumers are adopting FinTech solutions:
Besides all of the information put above, it is still possible to enlist many facts on how FinTech is disrupting banking as we know it and why it is gaining more adoption and importance within the financial services market:
FinTechs are not only good in developing new technologies, but they are good at fixing business problems creating a better customer experience
FinTech make financial services and financial technology accessible for the “underbanked” in developing Countries, which helps making small businesses more sustainable
The transparent and real‑time operation of FinTech innovations, such as blockchain and digital currencies, are generating new value streams — not just in financial services but across the economy
FinTech unleashes a new era of competition, innovation and job-creating productivity in many different economies and regional markets
FinTech is not just about monetizing data. It’s about how we can create and capture the value‑add from data, previously limited by previously available technology
Businesses and authorities receive structured access to almost unlimited data, which is not old‑style data mining but deep learning that permits previously unimagined insights and information that in turn allows more individualized products and services, and more efficient markets and systems
FinTech is allowing people to conduct transactions through their mobile phone or tablets, improving efficiency and the customer experience
Innovative financial services such as robot‑advice have the potential to extend financial advice beyond HNWI and more sophisticated investors, to a wider cross‑section of the community.
More digitized transactions support greater audit capability, transparency in payments systems and security in transactions by reducing risks you are also reducing the need for regulation.
FinTech can help drive improvements in traditional financial services and promote disruption through innovative new products and services, which can offer benefits to consumers and other sectors of the economy.
FinTech is reducing information asymmetry in the marketplace and thereby, helping to mitigate risk and promote more efficient allocation of scarce resources.
Shifting to a bank’s perspective, does FinTech represent a threat or an opportunity for collaboration to banks and financial institutions? According to an 2016 IDC research, approximately 25 percent of the big banks see FinTech firms as potential acquisitions, which is both surprising and uplifting news for the future of financial services worldwide. While the study shows different results from one region to another, the numbers are pretty conclusive. Aside for the 25 percent that have shown their interest in purchasing and incorporating FinTech startups, another 35 percent have stated they would not mind to collaborate with this particular category of companies, which sums up to 60 percent of all banks in the world that see FinTech as a collaborator. The graphic bellow shows this perspective on a global scale:
The market will likely see more incumbents starting to view FinTechs as acquisition potentials going forward, simply because some banks are starting to move past the “testing stage” in which they collaborated with FinTechs, either directly or through investment, to assess new technologies without fully committing to them. They now likely feel in a position to decide which FinTech solutions effectively meet their needs and are worth going all in on. Acquiring a FinTech provides banks with full control of the solution, enabling them to shape it to their specific needs, while also allowing them to market innovations under their own brand. From a FinTech’s perspective, a sale can be attractive because it removes the pressure of having to achieve profitability and scale independently in an increasingly crowded market.
Banks are still struggling to adopt digital transformation faster, despite CEOs and other C-Level board members imploring the business to do so. Today’s traditional banks and financial institutions seem to be unable to move at a necessary responsive speed in order address these threats, and there are two main reasons for it:
Organizational Issues: Banks have a large number of employees and are organized in silos. Internal communication reflects on their ability to respond fast to their customers and adapt to market changes. A good example is making a mortgage proposal, which will need a few weeks to be processed and returned to customers. All the stakeholders within a mortgage department, legal, risk and compliance have to agree to certain conditions before returning a proposal.
Technical issues: Banks have a huge amount of legacy systems and busy IT teams. Hundreds of legacy systems have accumulated over the years. These systems are heterogamous and even sometimes redundant. I have seen banks undertaking consolidation projects reducing legacy systems by a few hundreds but still managing redundant systems as some are business-critical systems built using technologies no longer supported. As a consequence, IT teams spend more time and efforts in maintenance work rather than in customer experience projects.
So, in order to overcome these issues, retail and investment banks still have strong strategies and possibilities to work on beyond financial assets, market position or regulatory compliance in order to avoid more losses to FinTech companies, which some are enlisted below:
Customer reliability: Banks and financial institutions must urgently leverage the trust people have their brands and other differentiating assets such as branches to manage their levels of satisfaction
Reduce the time for market: It’s not unusual for banks and other financial institutions to have a long time to market their products or services, once those may have a high risk involved, but, in a fast-paced scenarios, as the financial services market is nowadays, these institutions must rush and become pioneers in their markets to regain advantage over FinTech companies
Focus on technology innovation rather than overhaul: One of the greatest assets FinTech companies have is their technological innovation capabilities. As exposed before in this article, banks carry huge and complex legacy systems, and are more commonly interested in overhaul it instead of innovate it, which is a bad heritage for never having it business model disrupted. Now it is a great time to reconsider this practice.
Concentrate on retention, not on the acquisition of new clients: This is a common mistake that is not exclusive to banks and financial institutions, but customer centricity has been the main attractiveness on FinTech solutions, and often times banks and financial institutions forget that this has a financial impact as well, once acquiring a new client may costs around 7 times more than maintaining an existing one.
Dedicate more resources for surveys and research: Another example of bad heritage that banks and financial institutions carry. The fact that there were no other options to access financial services before made banks not truly interested in better understanding their clients existing or latent needs, and, as mentioned before, FinTech companies are capitalizing and succeeding exactly where banks were failing. A deep comprehension of your customers and clients needs is essential for a good customer-centric strategic plan
The Fourth Industrial Revolutions and the digital technologies that came along with it are probably causing the most profound era of change for financial services companies since the 1970s brought us index mutual funds, discount brokers and ATMs, and no firm is immune from this inevitable disruption, as well as every company must have a strategy to harness the powerful advantages of the new FinTech revolution. Although this is the first time ever the most traditional business model is suffering a great disruption, customers are likely to be the greatest winners of this battle.
Marco Antonio Cavallo is a technology/digital transformation evangelist and expert when it comes to the strategic role of CIOs, technology strategy and trends, FinTech, InsureTech and technology applied to business in many different countries and cultures, providing cross-border strategic orientation for different industries and executives. Given his corporate experience of almost 20 years, he brings a variety of insights, trends and market perceptions about different technologies and their usages in the Digital Economy.
Marco is the Founder and Chief of Research of the CGN Research & Advisory Group and has a successful professional history in many well-known international companies, such as Gartner, SAP Ariba, Comarch Systems, Volkswagen Financial Services (LeasePlan) and Lexmark International. He is also the founder of the CIO Global Network Group that gathers 7.500+ CIOs and other IT senior executives around the world, advisory board member for the Innovation and Technology Committee at the Florida International Bankers Association (FIBA), advisory board member for the Innovation and Technology Committee at Federación Latinoamericana de Bancos (FELABAN), author of many articles about digital transformation, technology trends and the role of the strategic CIO, among other IT-related topics and an active member of the IDG Influencer Network. Marco is an international keynote speaker for many different themes and conferences, such as Cl@b/Felaban 2017 (USA), Gartner CIO Summit (México), Mondato LATAM Summit (Argentina), APICON 2017 (Brazil) and Data Science Forum 2017 (Brazil).
Marco graduated in business administration by ESPM-SP University, MBA in Corporate Finance and Economics by FGV-SP University and has been through different specializations in many international renowned institutions such as Northwestern University/Kellogg School of Management (U.S.), McGill University (Canada), Florida International University (U.S.) and Erasmus University (the Netherlands).
The opinions expressed in this blog are those of Marco Antonio Cavallo and do not necessarily represent those of IDG Communications, Inc., its parent, subsidiary or affiliated companies.