By: Manoj Mistry, Managing Director, IBOS Association
FinTechs pride themselves on disruption: it’s become a trade mark, part of their DNA. This fits with their shared aim of improving, enabling and automating the delivery and use of traditional financial services – predominantly those offered by banks. Their widely stated mission is to challenge traditional banks by providing faster, cheaper and better services and products. The emergence of big FinTech players in financial services is relatively recent: the vast majority of them did not even exist a decade ago. In that time, innovation in the sector has been abundant, including new mobile payment systems such as Apple Pay and Google Wallet.
Meanwhile a range of online challenger banks, such as Starling, Monzo and Revolut, has continued to make headlines with an estimated 200+ FinTech companies having reached the $1bn valuation threshold, thereby confirming their status as unicorns. There has been significant investor interest too: for example, banking app Revolut recently raised another $800m in funding from big investors, taking its current valuation to $33bn (£24bn).
So what does this mean for the traditional banking sector and how have they responded to the challenge? Apart from continuing to scale back on their bricks and mortar networks and rebalance their online business models, the answer may lie in a range of technological trends which banks have embraced, allowing them to reinvent their customer offering in a digital world.
First among these is a combination of cloud technologies and big data. From a user perspective, cloud technologies are straightforward, providing access to data without any need to install special applications on their device. This allows banks to offer a wide range of products and services to their customers anywhere in the world by centralising services on the network. In turn, big data, provides these customers with personally targeted offerings based on sophisticated analysis of heterogeneous and fast-moving digital information. There are myriad sources of big data, including the internet, corporate document archives, readings taken from sensors and devices. And so on.
The second area of technological advance being deployed by banks is API (Application Programming Interface, i.e. application programming interface, application programming interface), which is integrated into their systems of interaction with customers. In summary, an API is a collection of classes, procedures, functions, structures and constants that are provided by an application, service, or operating system for use in external software products. According to IBM, the use of APIs represents more than just technical conduits for sharing data. Well-designed APIs provide organisations, such as banks, with a critical link to data and services that enable rapid innovation, opening up markets for new goods and services, and serving as the basis for future partnerships.
The final key element of technological innovation used by banks involves social media and mobile communications with special applications. The increased integration of banks’ businesses with social networks allows them to obtain information about customer preferences – Facebook being perhaps the most obvious example. Again, banks use this information in order to propose new financial products targeted to the specific needs of individual customers, thereby establishing relationships of trust with them, and accelerating the implementation of, for example, blockchain technologies.
How far these innovations will ultimately neutralise the threat of challenger banks as they erode the traditional bank-customer relationships is hard to determine. More certain is that the FinTech is here to stay. New technologies will continue to change how, where and when people use FinTech alternative banking and financial services. Unlike historical episodes of heightened competition in the banking sector, alternative providers are now emerging too frequently and evolving too fast for them to be dismissed or ignored. In part, this is due to GenZ’s insatiable appetite for more integrated services, delivered – without fuss – in an instant.
The Fintech revolution differs from past episodes of disruptive competition in speed, scale and scope. The global pace of innovation is unprecedented. Ignoring borders, and notwithstanding the regulatory barriers, new Fintech offerings are introduced and spread with ease around the world at an unprecedented rate. This fundamentally changes not only traditional banking business models, but also the underlying principles of financial services. Just as customer loyalty becomes ever more fickle, the levels of customer demand and expectation increase: the two are inextricably linked.
If the future of FinTech is driven as much by customer demand as by technology, then banks will have to become both more adept and more nimble in identifying and mitigating the risks it poses for them. Inevitably, that means that further change and innovation will be needed. This may not be what some banks want to contemplate, but it is arguably imperative for their long-term survival – at least in their present form.