It’s true: Fintech is disrupting financial services — A David & Goliath story

Fintech — the buzzword of 2016. Large financial services firms supported it with the hope that it would not cause any real disruption due to the ‘impossible’ maze of regulation and licensing these startups would need to navigate. But over the past few years, fintech, or financial technology, has grown to become one of the hottest sectors in the world.

Fintech covers a wide range of services, from making payments, crowd-funding, peer-to-peer lending, and wealth management — to name just a few. The new generation of fintech firms are not just targeting a few tech savvy users looking for a new shiny object to play with. These startups are now competing directly with the banks, and they want their piece of the pie. They’ve carved out their path, and users are attracted to their nimble and effective solutions, which has led to them being faster, cheaper and significantly more efficient. Financial institutions are not sitting still (anymore). They’re now fighting back and heavily investing their resources to take back their market.

Innovation in financial services is here to stay

The keyword here is innovation, and it looks like it is now the time for financial innovation. New technologies allow end-users to jump over the layers of hurdles the market has created (intermediaries, gatekeeper, brokers for brokers, etc), and allow them to access the financial products they want from the source, or at least closer to the source. This change has forced the banks and similar firms to review how they work in this new industry. This means reducing the inefficiencies they have been allowed to carry for years, leading to cost cutting on a scale that was seen as impossible only a few years ago.

There are a few key reasons why fintech firms are growing at such a pace. They provide customers access to products and services which were originally reserved for institutional clients or HNWI (high net worth individuals); They’ve adopted and created new and innovative business models, which traditional firms would struggle to compete with. And finally, and, in my opinion, most importantly, they have built their products around the customer experience, and focus their efforts on solutions to real user needs and problems.

Let’s do a quick review of the fintech world in 2016

  • There are over 1300 fintech companies across 54 countries. Between 2010 and 2015, almost $50bn was invested in fintech, with over 60% invested in the US, followed by 11% in the UK and 9% in Europe.
  • The leading fintech hubs are, as expected, New York, London, Singapore and Tel Aviv. But a host of European cities are moving fast and the future leading fintech hubs could include Oslo, Amsterdam, Copenhagen, Stockholm and Helsinki.
  • Over the past year, 3 unique trends have emerged, and are the hot-trends right now: Service-based investing, Robo-investing and Digital-based equity crowdfunding.
  • The largest investors in fintech include Citi Ventures, JP Morgan Chase, Goldman Sachs and Barclays.
  • The top categories for investment include finance/lending, payment gateways, and mobile wallets.

In addition to developments in operating and delivering products and services, new innovations such as blockchain have completely changed the way banks now work on the most basic of levels.

How will the incumbents respond to this growing threat?

As we’ve written about in previous articles, many financial services executives were oblivious to key fintech startups. This has changed dramatically as these startups are now making a real mark on their bottom line. So how do they respond?

Potentially the easiest and most predictable route is to buy any fintech firms that are making a dent, or they can attempt to develop their own competitive tech by adopting the startup/entrepreneur culture and mindset. We’ve seen many firms do this, by putting their teams into innovation bootcamps and sprint teams, to test and develop new (and sometimes crazy) ideas. ‘Fail fast’, ’involve real customers’ and ‘quick decisions’ are not phrases you would associate with the incumbents, but they are becoming more and more popular in traditional circles.

David & Goliath

Buy-out, integrate & overtake
Are these strategies sufficient to guarantee the survival of the traditional financial services firm? Not quite. Let’s take Wealthfront as an example. With over $2 billion under management and still growing, acquiring such a firm in the traditional way may just not be possible. As success stories like Wealthfront continue to grow, so will the threat to the survival of the incumbents.

Become centres for entrepreneurship and innovation
That leaves the development of in-house capability as the remaining option. Is it possible to take an organisation and teach them how to be entrepreneurs? Yes. Can you teach them to re-evaluate their approach to risk, failure and moving fast? Yes. Can you show them how to approach the real needs of the customers, involve them in the development and validation of prototypes and show them how to scale and grow the idea? Yes. Develop the right leadership, flexible governance and delegate ownership to the right people, and it is possible to create innovation and entrepreneurship within the large institutions.

So the real question is now not whether or not the incumbents will respond, or how they will respond. It is how quickly they will respond before the dent on the side of their Rolls requires more than just a paint job.

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