Fintech 2.0 Incumbents vs Challengers - Banking’s Battle Royale
by Michael Jaiyeola
The fundamental building blocks of finance and financial services (FS) are transforming driven by emerging technologies and changing societal, regulatory, industrial, commercial and economic demands. Fintech or financial technology is changing the FS industry via infrastructure-based technology and open APIs. The venue for last week’s World Fintech Forum was filled with fintechs from across the ecosystem and representatives from big banks. The agenda promised two days of talks that would cover the spectrum of discussion points that are occupying the industry and this blog post will look at the Top 10 Takeaways for those unable to attend the event.
- Great user experience is vital
- There’s a lot of regional variation in fintech disruption
- More challengers and incumbents are partnering
- Big Tech’s strength is in data
- Open Banking: regulations proving a boost to fintechs
- Blockchain: A dramatic increase in levels of investment
- For Cryptocurrencies - the jury’s still out
- AI is key
- Talent recruitment is one of the biggest challenges
- RegTech enables conforming with the changing regulatory landscape
1. The customer really is king
Consumers and business customers alike have embraced the idea of on-demand finance, thanks to mobile and cloud computing. Fintech trends show that people are more comfortable managing their money and business online, and they’re less willing to put up with the comparatively slower and less flexible processes of traditional financial services.
Present on day one of the conference was Laurence Krieger, COO of SME lender Tide, who views customer experience as the key advantage held by challengers. At Tide, they spotted the gap in SME banking where incumbents were simply offering the same type of products as those offered to retail customers but just repackaged as being for SMEs. Meanwhile, Filip Surowiak from ViaCash looked at how they are bridging the gap between cash and digital cash solutions by addressing the movement away from branch and ATM use to a more convenient model. It is these customer-centric approaches which will both win and retain business for fintechs and incumbents alike.
2. The West is moving at a different pace to Asia
While there are over 1,600 UK fintech companies, a figure set to double by 2030 according to the UK Government’s Tech Nation report, it’s emerging economies which lead the global charge in the sector. In the UK there is a 71 percent adoption of fintech while it’s 87 percent in both China and India.
Chinese fintech ecosystems have scaled and innovated faster than their counterparts in the West. In Asia there are singular platforms or super apps which combine FS entertainment and lifestyle products, as yet the equivalent does not exist elsewhere.
3. Partnerships are the favoured way to go for incumbents and fintechs
Despite recent announcements such as of HSBC’s Kinetic platform and Bo from RBS, for banks to build their own digital solutions takes significant investment and resources with no guarantees of success. It also takes significant capital to acquire a successful competing fintech. Strategic investments and partnerships was the approach most favoured by the incumbents present at Fintech Forum.
According to McKinsey’s report, Synergy and Disruption: Ten trends shaping fintech, 80 percent of financial institutions have entered fintech partnerships. Meanwhile, 82 percent expect to increase fintech partnerships in the next three to five years, according to a Department for International Trade report entitled UK FinTech State of the Nation.
At the conference BNY Mellon, RBS, Citi Ventures and others were all present and positioning their organisation as being a willing and accessible partner for budding fintech startups. Luis Valdich, MD at Citi Ventures, spoke of their success stories with Pindrop Security and Trulioo and warned us all to avoid being pushed towards a focus on services instead of on the product in collaborations. Udita Banerjee from RBS and Christian Hull from BNY Mellon also painted a welcoming environment in which ambitious startups can succeed.
4. Fintech v Techfin - Big Tech’s data riches
During day one’s panel on FS disruption - Stephanie Waismann, CCO from Barclays, outlined the key advantage for incumbents exists in the data which they hold. This may be true, but when it comes to the amount of data available - Big Tech’s GAFA (Google, Apple, Facebook and Amazon) are unrivalled. They appear poised to grab a substantial slice of the pie by leveraging their deep customer relationships and knowledge with which to offer financial products.
Joan Cuko, mobile payments analyst form Vodafone, examined Big Tech’s role in the future of FS, classifying them as frenemies and (again) collaboration was highlighted as being the ‘best path for long-term growth’.
The positioning of fintech challengers to align closer towards the tech part of what they do indicates the importance they attach to this side of their business. Noam Zeigerson, Chief Data Officer at Tandem Bank, poses the rhetorical question of whether they are either a bank or a tech player. Likewise, Tide’s Laurence Krieger sees fintechs as primarily being tech players and financial services providers second.
5. Open Banking’s untapped potential
Open Banking’s enabling technology APIs allow non-financial businesses to offer financial services to their clients based on customer banking data is recognised as having revolutionising potential.
Sam Overton, Head of Commercial at Bud, discussed the latent power behind Open Banking and how banks and fintechs can approach end consumers to empower them and prove that their data and privacy are not at risk. He emphasised the need for alignment on value issues where it is being approached in a one-fits-all approach and that for real traction there needs to be segmentation for individual user groups such as young parents.
6. Blockchain’s here to stay?
Although DLT or blockchain’s components – such as cryptographic hashes, distributed databases and consensus-building – are not new. When combined, they create a powerful new form of data sharing and asset transfer, capable of eliminating intermediaries, central third parties and expensive reconciliation processes.
Monday’s panel included Keith Bear, Fellow of The Cambridge Judge Business School, whose ‘2nd Global Blockchain Benchmarking Study’ found:
The Banking, Financial Markets and Insurance industries are responsible for the largest share of live (enterprise blockchain) networks.
Manu Manchal, Managing Director of Consensys, observes the FS landscape as one of price compression and increased competition with blockchain essential to contributing to the ultimate ‘goal of bringing the cost of providing financial products to zero’. Noam Zeigerson from Tandem Bank regards blockchain as the ‘most transformative technology of all time, only surpassed by the internet’. Soren Mortensen, Director of Global Financial Markets at IBM, summed things up nicely when it comes to blockchain in FS: ‘everyone acknowledges that the technology is proven – what’s needed is greater value propositions and use cases’.
7. For Cryptocurrencies - the jury’s out
OKCoin’s Head of Europe, Gabor Nguy, set out the case for cryptocurrency’s role within FS. While the benefits of blockchain for improving banks’ processes are accepted, cryptocurrency is still seen somewhat as the unruly upstart within much of the financial family. Gabor argued with broad agreement that ‘digital assets are here to stay’ – only this week a UK legal panel has defined their recognition of both digital assets and smart contracts.
Again, when it comes to the adoption of digital assets, Europe is some way behind in terms of mass adoption when compared to Asia. Our Technical Lead, Dominic Perini’s recent blog post discusses the psychology of digital asset ownership and provenance.
8. AI is the technology ‘must-have’ for banks
Whereas for many, blockchain is the technology which holds the biggest potential, the panel on the second day highlighted the role of AI. The global technology research firm, Gartner, estimates that the blockchain market will be worth roughly $23 billion by 2023, as a way of comparison the estimated business value created by AI is $3.9 trillion for 2022. Jeremy Sosabowski, who works with AI for risk analysing at Algo Dynamix, sees it as not being a nice-to-have, but a ‘must-have for banking’.
The biggest potential for AI lies around middle-office banking involving compliance and risk. Angelique Assaf spoke about Cedar Rose’s use of AI Powered Models for Credit Risk Assessments with a clear message that: ‘Data is our asset and AI is our tool’.
The key consideration for implementing AI was again focused on the question of To Build or To Buy. With 60 percent of AI talent being absorbed into the tech and FS sectors, Nils Mork-Ulnes, Head of Strategy at AIG, was on hand to provide valuable insight into building an AI centred product team.
Soren Mortensen from IBM framed things as AI not actually existing (not until at least 2050) – and what we currently have is Augmented Intelligence. He identified the key driver for successful AI implementation as data availability – it’s quality and appropriateness.
Of course, the high profile fallout involving the Goldman Sachs backed Apple Credit Card provides a timely reminder of the nascent nature of both cross-industry collaboration and the use of AI in the form of blackbox algorithms.
9. The human element is still key to success
Getting specialist skills, both technical and non-technical, is generally recognised as one of the biggest challenges in the fintech space. Laurence Krieger from Tide explained that, in his experience, the very best graduates now want to move into the fintech/startup world. Meanwhile, Stephanie Waismann from Barclays observed that many banks are looking to recruit form outside of the banking and FS industry for a broader range of skills and are going towards students and universities to help fill gap areas.
10. Regulatory compliance must be at the centre of planning
Emerging international standards have mostly taken the form of high-level principles, leaving national implementation (both regulation and supervision) to diverge considerably across jurisdictions and across different FS sectors. The Financial Conduct Authority (FCA) is a key influence in setting standards of regulation globally.
On hand to advise eager young startups on the importance of regulatory compliance was Ross Paolino, General Counsel at Western Union. Of course, FS is one of the most highly regulated industries and compliance is becoming of increasing importance whether that be for startups or large institutions.
Agreed upon by all was the fact that tech simply moves faster than regulators can regulate – and that the gap will always exist to a greater or lesser extent. He directs us towards sandboxes as the best options for new ideas to be tested.
Similarly to what we have witnessed with publishing, financial services are made up of information rather than physical goods and are therefore seen as one of the industries most vulnerable to disruption by software technology.
Of course, not all fintech startups are out to hurt banks, and in fact, many services use legacy platforms to bring them more customers. For incumbents the costs of digitisation are substantial, partnering with specialist vendors is the most efficient way to approach implementing changes to each technology layer. Trying to connect the dots between different parts of the community here in the UK and reaching out as a portal for organisations worldwide is Fintech Alliance who are backed by the Department for International trade. They aim to provide access to people, firms and information, including connections to investors, policy and regulatory updates, and the ability to attract and hire workers.
In the end, the talks from the stage and taking place during the networking sessions at the World Fintech Forum lived up to expectations and left an overall impression of positivity around the fintech ecosystem.
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