Disruptive technology – or fintech – has been garnering tremendous interest in the financial services sphere. The potential impact of fintech on conventional business models can be huge, at least in theory.
Fintech was included in Investopedia’s Top 10 Terms of 2015 and the industry is expected to be worth around $20 billion by 2017, according to a recent Statista report. Meanwhile, the Financial Times has quoted an Accenture report that shows the number of global fintech financing deals jumping up from around 400 a year in 2010 to around 1,100 by 2015.
2017 sees fintech innovation continue its march forward. The Financial Times has called it one of the leading forces shaping the banking industry, noting the power of third-party online applications – from established ones such as PayPal to newcomers such as TransferWise – in helping customers transact without involving a conventional lender in the chain of operations.
Then there are robo-advisors – a fintech application that has had a rapid and direct impact in terms of helping customers. Robo-advisors put financial investment services within reach of consumers wanting to access investment instruments and savings plans – without the relatively high fees of dealing with a financial advisor. Investopedia cites Wealthfront and Betterment as examples of services that have lowered barriers to entry for the casual investor. These robo-advisors ask a series of simple questions to establish a customer’s risk-reward appetite, and allocate portfolios accordingly.
Other fintech applications gaining traction involve budgeting apps, crowdfunding platforms and bankless fund transfers. When taken together, fintech innovations have the power to change how people access financial services.
The case of the GCC
In the GCC, there are two key trends that are driving the fintech revolution. First, nimble startups are helping deliver online and mobile services in areas such as remittances, insurance, investment advisory and online trading. They are also helping businesses and individuals access financing through crowdfunding. For example, the Beehive fintech platform is an example of innovative peer-to-peer financing. Simply put, P2P financing uses fintech reaching hundreds or even thousands of potential investors and borrowers. It enables people lending to people on a bigger scale.
Second, conventional financial institutions are creating digital channels to safeguard against the potential disruptive power of fintech. Rather than wait to be challenged, these institutions are trying to create a digital transformation to deliver better and faster services through multiple channels, including mobile and social media.
Challenges in fintech
Discourse around fintech has conventionally revolved around disruption. It’s easy to see why. The narrative is compelling, and the word itself is powerful. It promises dynamic, radical change.
The reality in the short-term might be a bit more prosaic. Fintech, for all its potential, has challenges to overcome. Larger institutions sometimes struggle with the startup, digital-first culture that fintech thrives in. On the other hand, startups often also don’t have the resources to contend with strict regulatory and anti-money laundering frameworks that are mandated for financial transactions. Financial transactions are heavily monitored and regulated – for good reason – and fintech firms need to be able to navigate this milieu. This, however, requires real-world reach, size and resources. And often, while the basic idea is innovative, fintech startups can’t scale up sufficiently to serve large audiences. The scalability challenge dilutes the beneficial impact that fintech promises.
Customer confidence is also a major challenge for new entrants and fintech startups. In theory, customers applaud new ideas. Pre-launch surveys tend to indicate that customers are very willing to try new ideas that will make their lives better. Unfortunately, there is a cognitive gap between answering surveys and actually using a service. Customers are inherently incredibly conservative when it comes to financial transactions. They prefer to use safe and stable institutions hewed out of brick. They visit outlets they can see and touch, where they can talk to the branch manager if need be. So while an early adopter fringe might take to new fintech apps quickly, the vast majority of customers will continue patronising conventional brands they have dealt with before. People generally don’t take chances with money, even if the alternative is faster and more convenient.
So, on the one hand, conventional institutions find it challenging to adopt a startup tech culture to drive innovation. On the other hand, nimble startups have a long way to go before they can make a meaningful difference to large audiences.
A move to collaboration
These twin challenges are driving conventional financial service providers and fintech firms closer together, and will spark in a spate of collaborations in the short to medium term.
This isn’t theoretical conjecture either. A few years ago, no one thought that incumbent banks and fintech challengers would find a happy middle ground. Yet, there has been a global spate of mutually beneficial collaborations in recent times. The disruption narrative is changing, to be replaced by one of partnership, mutual value and benefitting the consumer.
For instance, the EFMA-EFMA-Infosys Finacle “Innovation in Retail Banking 2016” survey shows the double-edged nature of the narrative. While 77% of banks came out saying that they thought the threat from non-traditional fintech competition was high or very high, a rather similar 73% said that partnering with fintech startups was the best way to access new technologies that would help them deliver new products, services and a better customer experience.
The survey also shows that financial institutions are taking two approaches to collaborating with fintech firms. They are either using their financial clout to set up incubators and accelerators to help find the next big fintech idea, or are partnering directly with relatively more established names.
Nor is this trend restricted to banks alone. Remittance and money transfer brands are also exploring partnerships with new technology channels.
There is plenty of open space for such collaboration in the remittance industry – one where 94% of recognised brands are conventionally brick and mortar. And while true disruption might be a while away due to the challenges fintech firms face in this space, there is tremendous opportunity for fintech players to tie up with conventional remittance houses to handle their transactions.
IMTOs, or International Money Transfer Organisations have some inherent advantages derived from their conventional business model. These brands have sunk considerable investment in curating networks of physical outlets across the markets they serve. They have built customer trust over many years of operation, backed by marketing campaigns, loyalty schemes and reward programmes. They rank customer loyalty highly. They also have strong historic relationships with regulators, banks and other stakeholders in the financial value chain. These incumbent advantages can’t be taken lightly.
The good news for fintech is that these strengths are complementary to their business. By mating their innovation to these conventional advantages, fintech players can scale faster. Incumbent partners can also help with regulatory approvals and AML considerations. Alternatively, there is space for what might be called a hybrid fintech model – where a transaction is initiated in-app but is then handled by conventional partners through their systems. Because the fintech app isn’t actually moving money around, this arrangement might allow regulatory compliance under the conventional remittance house’s license. And of course, conventional physical networks are a powerful tool for handling disbursements in emerging markets where people might want cash in hand.
Of course, established money transfer brands are also incubating their own technology-based services to stay ahead of the curve. Xpress Money, for instance, has developed it’s own plug n’ play fintech platform. It isn’t aimed directly at consumers. Rather, the flexible solution is designed for B2B partnerships, where financial institutions can plug directly into the system to use Xpress Money’s international transfer and direct account credit services. ADCB is an example of a well-known banking brand that relies on this fintech solution.
Collaboration with larger fintech platforms
The big fintech debate revolves around attention-catching technologies and slick apps. This often obscures the fact that the biggest fintech firms in the world are actually large-scale platforms – many of which can also deliver smart cloud, big data and financial services to existing institutions.
Leaders in KPMG’s 2016 Fintech100 report include Internet insurance company ZhongAn, which applies mobile Internet, cloud computing, big data and other new technologies to facilitate the insurance market; and e-commerce payment solutions Klarna.
For incumbent conventional financial institutions, it’s worth realising that the digital revolution isn’t just about shiny apps and user interfaces. Far more valuable is the ability to harnessing big data in new ways to gain insights into customers and create new products. And here, large-scale fintech solutions can deliver the expertise and knowledge needed to make a difference.
Co-operation is the way forward
Conventional financial institutions enjoy many benefits. They are trusted by customers, have carefully cultivated networks of outreach, and have geographical reach through branches, outlets, agents and partnerships. It’s true that, given enough time, fintech platforms might be able to replicate these advantages. But in the meantime, co-operation is the way forward for mutual benefit and a superior customer experience.
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