For many banks and financial services firms (incumbents), emerging financial technology firms (fintechs) were once viewed in two camps: flash-in-the pan, one-hit wonders or serious threats institutions should avoid. Perhaps the media was partially to blame for this “us vs. them” mentality with its prolific use of words like “disruption” or its positioning of fintechs as the only companies who embraced change or were capable of innovation. Beneath the exuberant headlines espousing the promise of these new technologies and the industries they would revolutionize, there was more than a hint of negativity, a healthy dose of fear mongering, and a pretty clear message, “Dear banks, you are not invited to the party. In fact, we are coming to crash yours.”
Although those of us who worked in banking and wealth management bristled at the tone and approach of these young companies, none of us could disagree with much of what they were saying: things were broken and radical change was afoot. Yet, there was something about the disruptor’s manifesto that seemed a little naïve, a bit misguided and certainly incomplete.
There was the assumption that financial institutions were resistant to change or opposed to innovation; neither of which, I would argue, were entirely true. For a myriad of reasons companies wanted change. The unspoken matter was how could they realize it in a cost effective and compliant way without disrupting any core processing or custodial technologies. Would these technologies integrate cleanly?
Fast forward to 2018
Much has changed. Many of the disruptive fintechs with their go-it-alone, direct-to-consumer business models have pivoted to business-to-business service models and now service the very companies and industries they set out to upend. Similarly, banks who either ignored the boisterous fintechs or chose to build internally are rethinking their strategies and engaging with start-ups.
What has changed?
The quick answer is everything. The disruptors have not only proven their technologies, but the market has begun demanding their services. Furthermore, the speed of innovation, adoption and deployment has quickened at such a rate that what was once deemed new or disruptive is suddenly table stakes.
Having experienced how difficult it is to create brand identity and how expensive it is to acquire clients, many fintechs have turned their focus to servicing institutional clients. Fintechs have a deeper understanding of the complex business activities and regulatory and compliance processes with which financial services must adhere and are designing their technologies accordingly. The technology is often preconfigured, ready to integrate into existing back-end processes, and deployable at a large scale.
Us vs. Them Becomes We
Fintechs are easier to partner with and their solutions have become easier to adopt. No longer is innovation limited to the banks or organizations with large IT budgets and staffs. FinTechs have made innovation available to all financial firms, with prices and engagement models that meet most budgets.
The nimble nature of fintechs has allowed them to adapt to changes and fine-tune their technology at a much quicker rate, bringing the most scalable solutions to the market. With an emphasis on engagement and a seamless experience for both clients and institutions, fintechs are no longer serious threats but rather trusted partners bringing a necessary business function to institutions.
Lastly, and equally important, the value proposition for incumbents to adopt digital solutions is clearer and far more comprehensive than previously articulated or understood. Fintechs make it easier for institutions to launch new business services such as wealth management or lending solutions to diversify product offerings, deepen client engagement, enhance client acquisition and strengthen loyalty. This not only helps grow the overall business, but many incumbents have realized significant cost savings through the automated processing solutions these new technologies offer and the elimination of manual back-end processes. As a result, businesses are seeing improved efficiency ratios and in some cases, higher valuations.
To conclude, a new breed of fintechs has emerged, many with the same face, most with a new sophistication and a deeper understanding of integration but all with the mission to empower. Transformation through collaboration is an impressive phenomenon, one that every firm should take advantage of and fintechs provide that opportunity.