According to M. Porter: “the “new economy” appears less like a new economy than like an old economy that has access to a new technology” (Porter, 2001). While this statement may be true for some industries, it is not entirely valid for the banking sector which got completely transformed through IT advancements during the last 30 years.
Before the advent of digital computers and the rise of the Internet, employees in financial firms had to keep record of all transactions on paper. Job hunting and advertising efforts were being conducted through newspapers. Nowadays every single bank department is transformed – through the introduction of various software programs, the Internet and IT enhancements in general (both software- and hardware-wise). Consequentially, new processes, jobs, and business models are continuously emerging.
Fintech
IT has helped financial institutions offer higher quality services and convenience, creating a potential for collaboration and mutual profit. There is a buzzword to describe the phenomenon – fintech.
But what gives fintech companies an advantage over traditional market players? The trick is that IT companies can engage in the banking business without having to go through strict regulations and complex processes. Exactly this window of opportunity threatens the old-fashioned and traditionalistic banks and favours technology firms.
So what new business models will emerge from the recent technology disruption? There are two major scenarios: banks will get stronger and improve their reputation through collaboration with tech companies or technology companies will get greedy and eventually start eating up bank’s market share.
Scenario 1: Collaboration
The sweet spot called fintech offers new opportunities for collaboration between fin and tech companies as the fin part (financial sector) is highly regulated while the tech part (technology sector) is not. Currently, tech firms are mainly concentrating on providing complementary products and services that do not require banking license. In the future, as they exhaust growth opportunities, tech companies might lose interest in entering the complex areas (products and services) of the banking sector, which require proper infrastructure, processes, and sufficient capital. On the other hand, banks enjoy a good reputation in the financial world and possess a valuable know-how. Thus, a future collaboration between financial and technology companies seems like a profitable opportunity for both sides.
Start-up Programs
Banks have shown great interest in start-ups by attending entrepreneurship- focused events or even sponsoring fintech start-ups. Examples are Fintech Innovation Lab, Startupbootcamp and other. Some banks take part in programs that allow them to benefit from IT developments by getting involved in various types of agreements.
Partnerships
Banks are also interested in partnerships with established IT companies. Such partnerships allow financial firms to buy services and/or products and implement them under their own brands. Additionally, by participating in business networks, banks and IT organisations can provide complementary products and services that better meet consumers’ needs. Examples are online and mobile banking platforms which are often not developed by banks themselves.
Scenario 2: Cannibalization
Cannibalization is the perfect term to describe the other option for fintech’s future. The term refers to the process of one kind eating species of its own kind. Since technology companies have started offering financial services and products, they have been eating up the profits of banks.
Banks – too big to fail?
A comparison of the Fortune 500 firms from 1995 and 2015 shows that only 12% of the largest corporations still exist (Perry, 2015). This means that the largest banks of today might not exist in 10 or 20 years. On the other hand, tech companies have been very successful in offering better financial solutions that are time-saving, convenient and correspond to the latest customer preferences shifts. The tech giants have sufficient capital, human resources and the advantage of technology know-how so one could argue that they have the capacity to replace the traditional banks.
Financial products and services offered by tech companies
Customers no longer need debit/credit cards to make payments and execute financial transactions. Mobile payments have become easier with the recent hardware and software advancements. Companies such as Alibaba (its affiliated company Ant Financial Services Group), Google Wallet, Paypal, etc. offer mobile payment services, without keeping customers money under custody (in their own premises). Ant Financial Services Group sells insurance products online and provides small loans to business owners that use Alibaba’s retails website. As tech companies continue to offer convenient financial solutions, banks might abandon less profitable products and services, and focus on highly complex solutions.
Conclusion
In order to keep their market shares and for some – to survive, banks need to consider new business models that involve collaboration with IT companies. The future of banks depends on their adaptability as well as on their willingness and success in embracing new technologies. On the other hand, technology companies should as well evaluate the pros and cons of entering new areas of the financial industry.
In the long term, I expect the financial industry to go through continuous transformations in terms of hardware and software. My personal predictions are that robots will replace bank tellers, programs will completely replace financial advisors and mobile payments will make money obsolete.
What do you think – what does the future of fintech hold?
If you are interested in additional fintech analysis and prognosis, you can find more information on Deloitte’s Banking Industry Outlook.
References:
“Banking Industry Outlook | Deloitte US | Center For Financial Services”. Deloitte United States. N.p., 2016. Web. 29 Sept. 2016.
“Fintech”. Investopedia. N.p., 2015. Web. 29 Sept. 2016.
“Fintech’S Golden Age: Competition To Collaboration – Accenture”. Accenture.com. N.p., 2016. Web. 29 Sept. 2016.
“Future Of Fintech And Banking – Accenture”. Accenture.com. N.p., 2016. Web. 29 Sept. 2016.
Group, Ant. “Ant Financial Services Group: Private Company Information – Businessweek”. Bloomberg.com. N.p., 2016. Web. 29 Sept. 2016.
Perry, Mark and Mark Perry. “Fortune 500 Firms In 1955 V. 2015; Only 12% Remain, Thanks To The Creative Destruction That Fuels Economic Prosperity – AEI”. AEI. N.p., 2015. Web. 29 Sept. 2016.
Porter, Michael E. “Strategy And The Internet”. Harvard Business Review March 2001 (2001): n. pag. Print.
“The Challenges And Pathways For “Fintech” Companies To Break The Traditional Financial Model”. Centrodeinnovacionbbva.com. N.p., 2016. Web. 29 Sept. 2016.
“Traditional Banks And Fintech Firms: New Collaboration Models”. ICAR. N.p., 2016. Web. 29 Sept. 2016.
I personally think it will be a combination of both. Every new fintech startup is only focussing on only a part of a bank, payments, current account, loans, mortgages, etc.
There are banks that have embraced fintech and started to collaborate with or take over fintech startups. The Spanish bank BBVA (https://www.bbva.es) has an interest in Atom Bank (challenger bank, UK; https://atombank.co.uk), and owns Simple (challenger bank, US; https://simple.com) and Holvi (SME challenger bank, DK; https://holvi.com).
Next there are fintech companies that are collaborating together to eventually replace every part of a traditional bank with fintech startups. This would be the collaboration of Number26 (now N26: https://n26.com) with Transferwise (https://transferwise.com)
The loser will be the traditional bank with a lot of physical branches that cannot compete on price ánd service anymore with banks that are truly digital, instant and direct.
Thank you for writing this very interesting article. I especially like the fact that you referred Michael Porter quote about technology. I actually strongly support Porters vision on technology. I am aware that most of his critics will say that he failed to predict the future of technology but I will disagree with them. I believe most of the online businesses are compliment to the already existing ones and those which are solely online only utilized the assets of within the industry of operation.
I really liked the fact that you analyzed two possible scenarios. No matter, I am a huge fan of the all digitalization processes that happened in the last years, I believe that both industries will benefit more if they collaborate. First, as you have mentioned the banking system has reputation among its customers and this is one of the main reasons its extinction is not near. Also, many people still do not trust online based platform or live in areas with limited connectivity. Although many people use online banking for most of their financial transaction, they still value security high and will stick to the trusted secured bank platform. Second, if Fintech wants to target laggard and late adopter it should collaboration with the banks and try to catch some spotlight of banks reputation. Third, banks will agile to technology changes and changing customer behavior. And who is better to help them during this journey than Fintech. Banks should use the opportunity to adopt some of the best practices.
With your post you gave me some food for thought and I will be eager to follow what will happen in the future and see which of the two scenario will prevail.