How Fintech is Spurring Innovation in Financial Services

Since the inception of the US banking system, change in the financial services industry has been slow to come. But historic trends of sluggish progress in finance might soon be a fixture of the past, thanks to recent technological advances in systems for storing and exchanging money. Online banking and other self-service oriented tech, as well as big data, machine learning and artificial intelligence (AI) are fueling a wave of disruptive evolution across the financial sphere.

The potential for industry disruption is palpable; around 80% of executives from mainstream financial firms are worried about competition from fast growing, data-driven companies. A portion of executives’ concern can be attributed to the threat posed by tech titans like Facebook, Apple and Amazon, who have set their sights on financial services. However, another prime source of competition for legacy banking services is the emergent field of financial technology startups.

These new companies often operate unburdened by industry consolidation, regulatory limitations and other established processes, thus rendering fintech firms capable of quickly innovating to serve an increasing consumer demand for custom, individualized service. Financial services, then, face the question of how best to serve customers amid an industry thick with change. Many legacy companies are starting to approach this issue through partnerships and acquisitions of fintech firms.

To explore fintech’s capacity for developing new solutions, some major firms are sponsoring non-profit groups focused on building and testing products. Jean Donnelly, executive director of Fintech Sandbox, says the company operates within a network of data and infrastructure partners, who provide promising fintech startups access to their tools, which they use to test new products and accelerate development. Sponsors of Fintech Sandbox include Fidelity Investments, Franklin Templeton, Thomson Reuters, and State Street Corporation, who through the organization are presented opportunities for partnership and investment in fintech firms that create beneficial tech.

Some industry giants like Capital One, Charles Schwab and Morgan Stanley have for decades directed significant focus toward utilizing big data analytics to optimize nascent technologies. A debate rages as to whether large, established companies or fledgling fintech firms are in an ideal position to create custom solutions. Manish Gupta, CEO of credit risk management service Corridor Platforms — and former executive vice president at American Express — believes fintech companies have the agility and focus needed to initiate disruption and spur the creation of new value.

Startups such as PayPal, Square and Lending Club exemplify fintech’s potential to offer strong market competition. Gupta said the disruption caused by successful fintech can serve to ignite innovation in legacy service firms, and prompt them to reevaluate partnerships and structure. One particularly lucrative field for fintech is marketplace lending; Gupta notes that big data is making credit decisioning is faster, and providing increased choice and flexibility when it comes to pricing options.

A few recent success stories in fintech include Quantopian: a 190,000-strong community for formulating and sharing investment algorithms and Kensho: an AI engine designed to allow non-experts to access financial services data and analytics, and Elsen: a platform for financial institutions that enables quick and easy analysis of highly complex data sets. But despite its victories, fintech still faces hurdles in business adoption, largely due to challenges associated with organizational culture. Established financial service firms will have to navigate these barriers as they attempt to keep pace with innovations introduced by independent fintech startups.