It is difficult to work in financial services and not hear the word ‘fintech’ on a daily basis. But what is fintech and why the hype? In its purest form fintech is the fusion of financial services and technology. There is also ‘insurtech’ (the use of technology in insurance) and ‘regtech’ (the use of technology which enables financial services organisations to comply with their regulatory obligations).
There are two movements in the fintech arena which might be seen to be competing.
The new kids on the block, ‘the innovators’, comprise trailblazing, technology-based financial services businesses such as GoCardless (for direct debit payments), Nutmeg (for robo-advice), ClearScore (for credit scoring) and Atom Bank (for banking services). The fintechs are the disruptors; businesses that are looking to challenge the traditional financial services model and disrupt it in the same way that Uber, Deliveroo or Airbnb have done in their respective sectors.
The traditional financial services firms, ‘the established players’, are the businesses that have the mass customer following, the brand, the legacy infrastructure and a strong compliance culture. They recognise the need to be more efficient, and want to improve their customer offering and drive down costs.
How is technology changing the financial services scene? As well as new innovation in robo-advice, payment technology and credit scoring, open application programming interfaces are expected to result in new services such as customer spending analysis and investment software. Technologies such as blockchain, automated processing and cloud-based solutions are already allowing back-office efficiency to improve generating real savings, faster processing and a better customer experience.
What is driving the revolution?
Three catalysts of the fintech revolution stand out: the regulator, customer demand and changing regulation.
Through its Sandbox, the UK’s Financial Conduct Authority provides innovators with support to navigate the regulatory system, devoting resources to guide young players in a complex market.
In parallel, younger generations such as Millennials demand an immediate, convenient service from their financial providers rather than needing to visit a bank branch. They are increasingly trusting and open-minded about innovative fintech solutions, which also offer cheaper ways to invest. But getting Millennials hooked is the easy part. Can fintechs appeal to traditional, more tech-sceptic baby boomers? BI Intelligence predicts that robo-advisers will control $8trn in assets by 2020. By that time, will the robo-advisers be run by fintechs alone or in collaboration with the established players?
Fintechs are built around providing a great customer experience. They offer new ways of satisfying customers, which means heavyweight institutions may be better off collaborating with fintechs than competing with them.
The development of EU and UK law is also forcing a change. For example, the Competition and Markets Authority Open Banking remedies and the requirements under Payment Services Directive 2 on banks to provide third-party access to their customer account information, will force banks to open up the financial services market to involve more players and increase competition, giving fintechs a huge opportunity. All financial services organisations will be thinking up new services to dovetail with traditional banking services, including banks who have not until now been pushed to extract value from the customer data they hold.
Until recent years, the established players have held a dominant position in the financial services market. They have traditionally been the first port of call for a customer requiring financial services. Fintechs need a financial institution’s data for the verification of their customer data as a core part of their business, for example to verify their customer’s bank account or provide their account balance. If the fintech is not offering a payment system itself, it may also need a bank’s regulated payment infrastructure as an add-on to its service. The established players are also adept at dealing with regulators, which is valuable experience to a fintech starting out on its regulatory journey.
On the other hand, the established players are missing some vital ingredients. Fintechs are built around providing a great customer experience, and aim to generate interactive and personalised relationships with their customers. Fintechs design the user experience to be frictionless, stress-free, intuitive and exciting. They offer new ways of satisfying customers, which means heavyweight institutions may be better off collaborating with fintechs than competing with them. Established players can also capitalise on a fintech’s agility and ability to innovate quickly. Security and data management is built into a fintech’s new IT system, allowing the customer experience to appear slick and efficient, while established players can be distracted by optimising their legacy IT, and the customer data flow can appear disjointed.
Overcoming the challenges to collaboration
In reality, some of the advantages can be barriers to collaboration. Each party may have different business priorities – but contractual solutions can help a collaboration come to fruition. An established player’s internal governance could stop collaborative ideas and momentum in its tracks. However, pre-designed contractual governance procedures for sign-off of various risk levels can help the relationship work.
Established players should also recognise that fintechs need money upfront in most arrangements and the contract could provide for an early payment timeline dependent on milestones being reached. The value of a fintech can manifest in its intellectual property. Unless the collaboration will result in the established player purchasing the fintech (and its IP), they should be respectful of a fintech’s need to protect its background IP – which it could be using to supply products and services to other customers.
In return for an established player committing to a fintech, the latter should be prepared for an established player to insist on an exclusivity arrangement. In order to achieve sign-off of such a collaborative contract, the established player will require internal cultural change and alignment between the forward-thinking technology teams and its legal, compliance and risk functions. Encouragingly, this movement is happening. Legal, risk and compliance are getting on board with the fintech opportunities that lie ahead, and the more they personally work with fintechs the more cultural change and collaboration are likely to flow.