It’s common knowledge that the emphasis of Fintech attention is on startups and their attempts to break up the financial services sector. However, how are financial institutions dealing with this new and potentially disruptive threat? It has taken them a long time to react to the upstart movement, despite their immense money, skill, and history of creativity.
Even though the term “fintech” (short for financial technology) is used to describe a contemporary trend, the use of technology to help financial services is far from new. During the 1950s and 1990s, the financial services sector developed credit cards, while in the new century, contactless payment technology was introduced.
Startups – actors outside of the traditional financial services industry – have played a major influence in popularizing this phrase. This emergence may be traced back to three key trends:
Fixed assets (like branches) were historically needed to grow the financial services sector, making it difficult for entrants to break in. Startups may now manage complicated operations remotely thanks to advances in technology.
Banking consumers have higher expectations now than they had before the Global Financial Crisis of 2008 and numerous scandals that have plagued the banking industry. Technology has given customers the ability to examine their service providers more closely, and new entrants are taking advantage of this to provide cleaner and more effective customer service that is unencumbered by old technology.
Regulation has cost the six biggest US financial firms an estimated $70 billion each year since 2008. Citigroup’s compliance section alone employs almost 30,000 people worldwide. Restrictions on lending have raised the full-loaded borrowing costs for customers as well as decreased the capacity of banks to provide it, apart from complying with laws. Because they are not de facto banks (and thus subject to less supervision), entrepreneurs have been able to come in and provide appealing alternatives. It seems from the fintech industry’s narrative that new entrants are leveraging technology to upset the status quo.
In spite of this, like it’s shown here, there is little evidence to indicate that banks are about to have a Blockbuster or Kodak moment. They’re still a well-known, successful, and cash-rich company. It’s my belief that their reaction to the “fintech versus banks” movement has been subpar therefore this essay will focus on how they might improve their answer.
Startups vs Retail Banking
Most fintech companies haven’t thought about how their disruptive innovations would affect every aspect of financial services yet. Of the companies that were studied, 62% are focusing on the retail banking market, while just 11% are aiming to provide big corporate banking services.
Due to the embryonic stage of the industry’s growth, banks must act quickly in reaction to fintech disruption. Start-ups in the fintech sector are primarily concerned with the idea of breaking up banks, providing a single kind of product or service, and doing it exceptionally well.
Fintech innovation has mostly focused on enhancing customer-facing aspects of financial services, rather than the back end. Here are a few examples of how this is done:
- Better service: Customers are more likely to stay with a conventional bank because of the higher switching costs associated with the wide variety of services they are offered. Without this luxury, specialist fintech firms pursue a philosophy of building trust via improved customer service and client acquisition based on referrals. Ninety percent of fintech firms say their competitive edge is improved customer experience.
- Increasing your company’s visibility: The fintech sector is revitalizing the branding of the legacy services it is seeking to replace with the help of workers from backgrounds outside of conventional banking. Gamification, one of today’s most popular marketing techniques, makes even the most boring activities like budgeting seem fun and interesting to the audience.
- Low-cost products: By not being regulated as a deposit-gathering institution, and by receiving venture capital funding, fintech companies are able to provide competitive pricing to consumers.
Fintech vs Financial Services
A fintech company may test its product, get feedback, and buy time while it works on the second paradigm: enhancing the back end of financial services. The industry’s “rails,” or back-end infrastructure, include things like clearing, payment, and messaging systems, which allow banks to communicate and transact with one another. However, despite the tremendous potential of new technology applications such as blockchain technology inside these fields, widespread efforts to challenge these standards have yet to take hold.
While a financial company may have better customer service and more attractive applications upfront, the backend functions much like a bank. They do wonders for the customer perception of the system, covering up flaws and bureaucracy and making outlandish promises in the process.
Fintech will face a significant strategic risk until it can transition to fintech 2.0 and build its own rails, at which point banks will have enough opportunity to react. Fintech companies must create a new, technologically-driven back-end for the financial services sector if they are to succeed. If they stick with the tech-driven front end and the leased process-driven back end from previous generations, their margins will continue to be compressed and their operational risks will rise.