Banks Vs FinTech - Disruption or Transformation?

For the longest time, banks have been at the centre of the financial universe; central to businesses, economic growth, innovation and much more. However, recent developments in financial technology prompts the inevitable question - are banks position as the predominant player in the financial industry currently at risk?

There are many sides to this argument. In my previous post, I shared how FinTech firms should not be viewed as foes; instead, a more inclusive and collaborative approach should be adopted towards such startups. Today, I would like to touch on a slightly different aspect of the debate - whether FinTech firms should be viewed as agents of disruption or as drivers for transformation.

The latest World Retail Banking Report 2016 found that banks are struggling to keep up with the disruption that FinTech companies bring to the table. This is true in many ways, albeit one caveat - banks can actually adapt and thrive alongside their FinTech counterparts. Views that suggest that banks and FinTech firms are in direct competition, and for either party to triumph, the former must attain innovation before the latter achieves scale, are missing the point. Such standpoint assumes that the relationship is less collaborative. In reality, however, the relationship is supplementary - most FinTech firms serve to support the banking industry rather than disintermediating, disrupting or displacing it.

Banks & FinTech - A Symbiotic Relationship

Once this perspective is adopted, a clearer view of the relationship between FinTech firms and banks can be uncovered. FinTech firms, although much more agile to the nuances in financial technology and consumer experience, often find it simpler to work alongside banks that have already passed regulatory muster and are fully licenced to take insured customer deposits. The technological innovations and services offered by FinTech firms are limited especially at scale, thus, much of the advancements of such firms rely heavily on the established financial services industry.

Take Apple Pay as an example. The cardless payment system was introduced with much promise, but it still faced its fair share of problems on multiple fronts - from compatibility issues, merchant penetrations and consumer adoption. The situation could have been much worse, if not for the support from banking partners. Apple Pay managed to infiltrate several banks, which isn’t surprising as 84% of banks and credit unions surveyed in a study admitted that they were actively involved in a mobile payments rollout. This is an aspect that is often overlooked when weighing FinTech’s success rate - the participation and cooperation from financial institutions are usually critical in the success of the services offered by their FinTech counterparts.

Road towards Transformation

Whether or not banks are fully embracing FinTech firms as allies, many are investing heavily to include these firms within their strategy. The table below gives an insight into what banks are currently doing in order to include FinTech within their processes:

Credit: EY

These investments come with varied time commitment, funding requirements and returns potential, and most banks participate in one or more of such activities according to their institution's objectives. FinTech partnerships provide the potential for banks to innovate in areas that can transform the bank’s strengths. However, banks must firstly decide if they are innovating to:

1.    Build their traditional strengths

This can be in areas that FinTech firms face restrictions, such as credit decisioning or regulatory compliance. By tapping into the expertise of FinTech and innovating in these areas, banks can gain a competitive advantage.

2.    Develop market-facing innovations

This can be in the form of inventing new propositions for customers. The input and technological innovations from FinTech firms can help banks introduce innovative functionalities that solve existing customer issues.

3.    Innovate at the enterprise level

This promotes innovation on an organisational scale, which requires front, middle and back office participation. Collaboration with FinTech allows the bank to work together to create new prototypes that can jointly tackle business problems.

The banking industry has been one of the last sectors resistant to change, but the emergence of FinTech firms has certainly brought down many of such barriers. At the start, FinTech firms were labeled as disruptive, as it brought down many of the long standing establishments in the financial industry.

However, as the initial dust settled, the relationship between banks and FinTech became more complementary as opposed to competitive. Further collaboration between the two parties can uncover opportunities in many other areas, such as real-time payments, P2P lending and Big Data, amongst many others.

For now, one thing should be made clear: FinTech firms should not be seen as agents of disruption, but rather, as drivers for change - one that will transform the banking industry towards greater efficiency.