Co-authored by: Barath Gopalan
FinTech – a creative leverage of emerging technology to define a new Art of the Possible for the BFSI industry – appears to be approaching lifecycle maturity. Focus areas are getting sharply defined and evolving engagement models between FinTechs and high-street banks are getting clearer.
This blog explores the economic value of FinTechs, identifies dominant FinTech trends, and offers a view of the future of Bank-FinTech partnerships.
THE FINTECH BOOM
Between 2013 and 2016, global investment in FinTech topped US$ 100 billiona. FinTechs have mushroomed either as “Challenger” banks like Atom, Tandem and Fidor, offering tech-powered, and often branchless, banking services; or as “Neo” banks like Moven, offering platform services (PFM, Mobility) as Digital accelerators. Challenger banks include niche players like TransferWise in Payments, Zopa in Lending, or eToro in Trading.
Fear of losing business to FinTechs is endemic among banks, with 88% of bankersb believing that part of their business is at risk. Major threat areas are Payments, Funds Transfers, Personal Finance and Lending. Example - FinTech-powered P2P lending in the UK (individuals + businesses) grew by £1.0 billion in Q1 2017c.
Driving the FinTech revolution are the following key dynamics:
- High cost, and opacity of cost, of banking services. Retail cross-border remittances through many traditional banks cost upwards of 5% in the form of fees and hidden exchange rate margins, while TransferWise fees are typically in the 0.7% - 1% range.
- Agility of traditional banks being hindered by inflexible legacy technology. Almost 43% of bank systems in the US are based on Cobol programsa. Asset-light FinTechs are much more agile and customer-centric.
- Traditional banks yielding to FinTechs in innovation and technology leadership. This is driven by multiple factors – under-representation of technocrats in banks’ boards, rapidly shrinking technology lifecycles, and ubiquity of data (further facilitated by regulations like PSD2).
Now an industry in its own right, FinTech is displaying a set of consolidation patterns, which are examined below.
Symbiosis – “If you can’t beat them, join them”
Banks need the technology edge that FinTechs have, providing in return the required capital and regulatory compliance. The Spanish bank BBVA, through its investment arm BBVA Digital, have taken synergistic stakes in Simple (a direct bank with a PFM focus), Holvi (a Finnish online business banking service provider), Openpay (a Mexican online Payments start-up), the mobile-only UK bank ATOM, and many other FinTech players.
Deriving Opportunities from Regulations
FinTechs have turned regulations into opportunities for themselves and for banks. Examples - Fidor and BBVA have achieved early PSD2 compliance, and additional gains, through their API markets. By exposing data on customers, accounts, card purchases (aggregated) and pre-approved loans, banks are leveraging an active developer community to create new possibilities in PFM, advisory, frictionless payments and other services.
Emergence of Focus Areas
Much of FinTech efforts and investments are concentrated in Blockchain, Artificial Intelligence, Biometrics and Identity Managementb.
Platforms offer “something-as-a-service” for rent. The consuming entity gets best-of–breed services, gains agility, and benefits from a variable cost model. Moven enables retail banks to deliver customer-centric experience. solarisBank is a fully licensed digital bank – providing on-tap licensed services like account and transaction services, compliance and trust solutions, working capital financing, and online loans – enabling FinTech start-ups to offer an array of banking services.
THE SHAPE OF THINGS TO COME
We conclude with a two-step analysis. First, we analyse the factors of competition for various players in the Bank-FinTech world, their likely responses to these factors, and the corresponding pay-offs to customers. Then, we depict a “Bank of the Future” as a consumer-cum-trader of business services and a seller of customer experience.
The Competition and the Players
Challenger banks will shift from an exclusive focus on customer experience to a sustainable cost structure and business model. Cost advantages gained from focused technology estates and branchless distribution can be significantly augmented by offshoring.
As a competitive strategy, Challenger banks will consolidate in areas left underserved by the traditional banks – e.g., student loans. Geographically, we expect concentration in regulatory sweet spots like UK and Singapore.
Neo banks will flourish through rapid generation and morphing of ideas and solutions, and through alliances with the other players.
Traditional banks, caught in price and differentiation wars, will seek deep partnerships with FinTechs, particularly Neo banks.
Customers will see lower costs, 24/7 cross-channel access, flexibility, exotic products, low touch experience and supremely personalized services. Insights gained through deep learning will translate into focused and high-yield campaigns and products. There will be faster and more astute credit decisions, incorporating factors like history of remittance receipts, or social media sentiments.
The Bank (or FinTech, or whatever) of the Future
The bank of tomorrow will be a technological entity, purveying financial+ services – “a tech company with a banking licence,” as Ralph Hamers, CEO of ING Bank, puts it. As Bank-FinTech partnerships evolve, they will become increasingly indistinguishable from each other. In parallel, the Bank-as-a-Service model will come of age.
Tomorrow’s bank will aggregate business micro-services provided by multiple FinTechs and other platforms. The micro-services will not only be financial, but include “marketplace” components too – e.g., property listings, restaurant locators, or transport booking services. The bank will consume these micro-services, bundle them as customer services, and pass some of them on to developer communities and other banks / FinTechs for symbiotic gains – building app stores, for example.
The platforms will run on continuously upgraded open-source technology and blockchains. The ecosystem will reside on multi-tenant cloud architecture, with APIs exposing micro-services that flow into and out of the junction.
The bank itself will have a minimal IT estate. A middleware layer will provide abstraction, orchestration and bundling of the micro-services, while a layer of business rules will enrich and direct personalized banking services to customers across various channels.
FinTechs have ushered in a disruptive and virtuous cycle of expectation and fulfilment that will completely transform the business of banking from what it has been for the major part of the last 400 years!
- American Banker webinar - Reinventing the banking experience with Digital Bank
- PWC Global FinTech Survey 2017