© Rawpixel.com/Shutterstock.comSome of this disruption is coming from the perception that BigTech giants, such as Amazon, Ant Financial, Apple, Facebook, and Google, are likely to roll out industry-changing platforms and technologies that compete with more traditional offerings. However, emerging FinTech start-ups are also challenging the status quo by providing innovative services and increased personalization, particularly in the consumer space rather than the wholesale arena.
FinTech, which is shorthand for “financial technology,” is the drive to bring transformative and disruptive innovation to financial services by applying new and emerging technologies and satisfying consumer needs through automation.
Traditional financial services institutions are right to be nervous about the growing successes of FinTech firms. By their very nature, FinTech start-ups have a number of advantages. Here’s a brief comparison:- For starters, FinTech start-ups are nimble. Because they aren’t disadvantaged by inherited older systems and methodologies, they can move faster to create new solutions. Their top leadership is also focused on creating the future, rather than maintaining the status quo, so they aren’t resistant to investing heavily in technological development and innovation.
- In contrast, traditional banks, brokers, and asset managers have weighty existing systems to support, limiting what they can spend on innovation. They are also subject to greater regulatory and institutional constraints that limit their ability to fully focus resources on new technology.
FinTech companies must provide trust and value
Both consumers and businesses select financial services using two basic criteria:- Is it a trustworthy institution?
- Do the services offered meet my needs at a competitive price while providing value-added services that make my life easier?
Trust
In today’s environment, a “trustworthy” financial institution is one that can be relied on to hold up its end of the relationship by being a responsible steward of the customer’s assets and information. This means safeguarding every aspect of the relationship, preventing harm from both internal and external sources. This can include- Maintaining the financial services company’s ongoing solvency and success. Nobody wants to use a financial services company that might go out of business at any moment or that doesn’t have the resources to invest in the latest and best capabilities.
- Safeguarding the customer’s investment, both physically and digitally, maintaining effective vigilance against data thieves and saboteurs. Cybersecurity is critical for this point; a cybersecurity breach that exposes customer or supplier data can damage an institution’s reputation irreparably.
- Safeguarding the customer’s privacy. Customers want to know that their sensitive financial data is going to stay private and not be compromised by hackers or careless internal handling.
Value
The second part of the equation is the services and their value. What does the financial service provider bring to the table that the customer wants? In an ideal world, the customer wants all the services, and all the options for receiving them, for the lowest possible price. The challenge, then, is to be the provider that best meets that demand.One way that providers are able to offer greater value to customers is through disintermediation. To disintermediate means to cut out some or all the steps between two points — in other words, to “cut out the middle man.” Financial services traditionally has had lots of intermediate steps between a consumer’s need and its fulfillment, creating lucrative careers for stockbrokers, tellers, credit card processors, personal bankers, and even check-printing companies. However, in today’s market, disintermediation is becoming not only the norm but a near imperative to keep up with demand for lower costs and better value.
Fortunately, advancing technology has made it possible to automate many areas of the financial services value chain that were strictly manual operations in the past. This has enabled companies to economically provide services to customers that were expensive in the past due to the labor involved. In this endeavor, FinTech companies are better positioned than their traditional counterparts. They can be more responsive, more focused, and less distracted by legacy issues such as fixed cost, old infrastructure, and dated technology.The established players have been slow to respond to FinTech’s disintermediation and disruption because they haven’t wanted to cannibalize their legacy franchises. Many have attempted to offer digitalization only in noncore businesses or geographical areas. For example, some large banking institutions have experimented with offering new experiences such as payment services that compete with FinTech payment providers. However, these new offerings often require significant investment in new technologies to “get in the game,” such as mobile-friendly site design, cryptocurrency, and digital wallets. They must respond to continually advancing technology, changing consumer habits, and in some cases underserved and underbanked markets.
In China, the most successful FinTech firms have been BigTech companies that developed financial ecosystems in conjunction with their highly engaged consumers. One example, Ant Financial, was created on the back of Alibaba’s e-commerce platform, offering online payments, investments, digital banking, lending, and wallets. This was possible because China’s FinTech ecosystem is fundamentally different from that of the United States and Europe. In Western economies, successful FinTech firms have been disruptors, particularly in the payments, lending, and wealth management sectors. They have benefited from extensive consumer adoption of mobile technologies and internet access. Ant Financial is closer to the notion of TechFin rather than FinTech, where a large technology firm leverages its technology prowess to deliver financial products within its more efficient, broader service offering. It can also do this because it has generated a level of trust with clients that was previously reserved for traditional financial institutions.