When new technology companies began developing innovative business models and applications in the world of finance, many commentators suggested that the industry was heading for a revolution. Banking was, after all, ripe for disruption.
As a slow-moving, conservative industry with a poor reputation for customer service, many doubted that it would be able to keep up with the digital transformation being offered by these new fintech companies.
“A few years ago people were expecting that fintech would completely revolutionise the industry and take all of the banks’ customers away,” says Ben Robinson, head of strategy and the self-service digital store known as Marketplace at enterprise software specialist Temenos.
“That, however, hasn’t happened. Last year the Economist Intelligence Unit found that fintech companies had so far captured a market share of only about 2%.”
If one looks at that statistic alone, one might say that the disruption caused by fintech companies has therefore not been material. But Robinson believes it would be a mistake to take this simplistic view.
“For a start, we would say that fintech is still emerging,” he argues. “So 2% could easily become a much bigger number in a short space of time. We do also already have some very big fintech companies, like PayPal.”
Secondly, the indirect impact of fintech on the banking industry has been significant.
“Fintech has put a lot of pressure on banks to improve the customer experience, reduce friction and lower prices,” Robinson says. “The amount of money that banks are able to make in areas like forex or remittances has been shrinking considerably because they are under pressure. While people are not moving wholesale to new alternatives, banks are having to lower their spreads to remain competitive.”
Finally, there has been a significant shift in the approach of many fintech companies. Instead of trying to compete against banks with their own solutions, they are instead working together with them. This is a big trend in areas such as security and automation.
While this represents a new dynamic in the industry, there are often substantial differences between how banks and fintech companies operate, which means these partnerships are often difficult.
“We recently surveyed a number of companies as part of a Temenos report into how fintech is evolving, and the majority of fintech companies believe that banks have become more willing to work with them,” Robinson notes. “However, they don’t see much improvement in their ability to deploy fintech solutions.”
The result is that very few solutions make it into production as the ability of banks to deploy them hasn’t kept up with their willingness to do so.
“As part of the study, we asked banks what the challenges are of working with fintech companies, and they boil down to two things,” Robinson explains. “The first is finding the right ones. There are something like 20 000 fintech companies out there, so it is difficult for banks to cut through the noise and do the market screening to figure out which ones they should work with.
“The other challenge is that once they have found the right fintech company, they have to steer them through procurement, through IT security, through legal – and these are processes that are still Byzantine,” he adds. “Even once you’ve done all of that you have to integrate them into legacy systems, which is a complicated exercise. So the desire to work with fintech companies does not translate automatically into lots of fintech companies working with banks.”
New business models
In this new era, fintech is also looking at different approaches. One big area where this is happening is with blockchain.
“I think we are now through the hype cycle with blockchain,” Robinson believes. “We were at the peak of expectations last year when it was going to solve everything, but we are getting to the point now where we are seeing real-use cases crystallised and being put into production.”
Fintech is also developing new business models around cyber security and privacy in response to growing threats and greater regulatory and customer requirements to keep data private. Another area where new applications are emerging is in niche solutions to meet specific customer demographics.
“This is about re-imagining solutions based on customers rather than products,” Robinson explains. “An example is Trezeo in Ireland, which is a solution for gig economy work. As the income of the self-employed tends to be volatile, Trezeo smooths it by saving in the months that are above trend, and giving access to top-ups when it’s short.”
It does this for a fixed fee so that the gig worker has peace of mind that they can budget for.
“Models like this are difficult for an incumbent bank to launch because it is part lending, part deposits, part current account, which all tend to be handled separately in different silos,” Robinson notes. “A fintech can however match these needs without those legacy constraints.”
First published on MoneyWeb.co.za