When looking at innovation in fintech, many commentators fail to realise that the financial services industry comprises a diverse set of sectors. These are subject to differing levels of innovation, competitive pressures and market regulation. The most consumer-facing (for example, retail banking or insurance) face the most visible digital disruption to their business models. The recent demonetisation in India showcased how quickly a new payment model such as Paytm could become mainstream quickly by adding convenience and security, especially amongst millennials. Indian start-ups have an edge in the retail fintech space given the opportunity from widespread use of mobile technology and a young, millennial-heavy demographic. However, traditional players such as banks and insurance companies are not standing idle; they recognise the threat/opportunity posed by digitalisation. They possess vast amounts of customer data, big balance sheets and have an established model for regulatory oversight: all potent competitive moats. Fintech innovation has had the most notable impact in retail financial services to-date. Areas such as online payments, credit scoring, customer profiling and identity management are being transformed. At the corporate and institutional-level such widespread impact is yet to be felt. Some technologies have the potential for widespread disruption but this will not happen overnight given the heavy government regulation in capital markets and the power of incumbent players.
For example, the distributed ledger technology behind block chain could reduce market friction in specific areas such as settlement/ clearing of trades, electronic contracts, and creating a more secure way for capital markets institutions to interact with one another. Several investment and commercial banks are looking actively at blockchain technology and running pilots to test its potential. Investment managers have been jolted into taking pro-active steps by fintech companies looking to disintermediate them either by replacing wealth managers with ‘robo-advisors” or building artificial intelligence-based trading models to sweep the internet for investment opportunities. Similarly, the use of AI and machine learning is becoming more prevalent amongst fund managers as they look to reduce operating costs as well as gain an investment edge. Across the capital markets space, a sizable opportunity awaits the right players.
Traditional financial institutions may have significant advantages over many of the fintech companies, particularly start-ups. Obviously, they have the manpower and financial resources to invest in fintech and have access to data—their customer accounts and profiles —which can be used to create new products and services. But often these institutions lack technological expertise and perhaps even the creativity needed to envision and build new product offerings and value propositions. It does not matter how many create their own fintech units or labs, the real innovation often happens outside. Therefore, partnering makes sense, either co-investing in fintech companies and start-ups or acquiring them outright. As Apple’s co-founder Steve Jobs said: “Consumers don’t know what they want until we’ve shown them.” The same could be said in finance as fintech and finance lose their distinction and become synonymous with one another. Uneven innovation is a sign of the current times. But sectors such as investment and corporate banking will catch up with retail finance as the inevitable rise of digital disruption washes over the entire industry.
FFB is a not-for-profit platform that engages different types of financial institutions of the country; assist them in their journey to reach next level