September 16, 2016

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The FinTech – Financial Institution Marriage

There is a lot going on in the Financial Services industry. One thing that every Financial Institution and Technology provider keep discussing alike in their board meetings and presentations is about the revolutionizing FinTech sector – What is the FinTech strategy? Is there a potential business threat from an existing or upcoming FinTech player? Are we launching FinTech suite of products and services, is there a collaboration strategy etc.? Guess there isn’t any financial institution or solution provider who is not weaving in the FinTech approach – more so that almost every FI and technology provider now has a new role defined as Head of FinTech.

FinTech is a sector that is certainly not short of the hype. FinTech describes a business section where technology is replacing and often disrupting financial processes, the possibilities are enormous! Here, the old, tried and true methods are being replaced with newer, faster, and more automated methods of getting things done. According to a report published on Canadian FinTech, the number of FinTech companies has grown 26% year-over-year and global investment is on track to reach USD 8 billion by 2018. FinTech startups are targeting the customer pain points and profit pools with innovative, advanced, easy-to-use, and cost-efficient solutions, which are now creating a vibrant environment for businesses to flourish.

Here are a few aspects that are characteristic of FinTechs:

  1. The value proposition, the problem they are trying to solve,
  2. The business model of how they are going about it, and
  3. The operating technology under the hood

FinTechs are redefining the business rules with almost zero cost to the consumer for the same set of services—in fact, with better performance and ease of transaction. Financial institutions that are already struggling with profit margins, ROE, and regulatory pressures are witnessing unprecedented levels of disruption. It is thus obvious that the FinTech sector and traditional financial institutions are competing head on for the same pie.

There are three different strategies that are prevalent in the market today:

Strategy1 : FinTech and Financial Institutions as Standalone Entities

In this scenario, the FinTech and the financial institution such as the bank participate in the market as standalone entities or players. There are few unique features and each one plays to its strengths. For example, FinTech’s strengths would be speed and be experimental, resulted-oriented, and cohesive. Financial institution’s strengths lie in access to data, resources already in place, customer and market trust, and expertise in complying with various regulatory requirements.

It also means that there will be limitations. One’s strength will be the other’s weakness. For example, FinTechs have no brand; they may have access to technology but have no access to data that gets fed into these technologies; their budgets are limited; and they have little or no regulatory expertise. They can flourish by themselves but it may be a long and time-consuming process and they may have to reinvent the wheel on many fronts. For financial institutions, it will be slowness in response or time to market, risk-averseness owing to a large customer base, age-old processes, inability to provide tailored products/services, and siloed ways of working.

FinTech is like the new kid on the block who is innovative, smart, and loved by everyone. But when it comes to much larger tasks and surviving in the long run, it might struggle. And that’s where it will need the support of established businesses.

I will be covering about the remaining two strategies in my next part of this blog.