Disrupting the Financial Services Industry: Fintech 2.0
Welcome again to my series of articles around a Fintech retrospective. In the previous article I described the origins of the Financial Technology revolution, raising startups challenging incumbents in a sudden evolution that lead us to a new wave of disruption, or what many of us labeled as “Fintech 2.0”. Let’s talk about of what this is all about
Fintech 2.0 “Disruptive Collaboration”
After the first wave of disruption, in theory everything seemed to be the perfect storm for the fintechs, but in practice they faced real issues: Fintech startups struggled to scale, due the fact that the “owners” of the customers were still the banks. Furthermore, a sense of distrust appeared (a person might say “how can I trust this fintech? What if my money end up into a hacker’s account in the other side of the world?”). At the end of the day banks were the evil, but a “regulated” and therefore trustworthy evils
Moreover, several fintech companies crashed against the regulations walls, due to their lack of knowledge of what was possible and was not. Somehow, they found themselves with innovative ideas, but unable to implement them effectively
Nevertheless, these efforts caught banks attention. In spite of having under control the market, they acknowledge the potential threat in the near future. In the same way, somehow they found themselves with great corporations, and huge customers portfolio, but without any clue of how to innovate their services effectively
This is the point where both contenders found their common interests aligned, leveraging each other strengths. Banks would boost fintechs offerings to their large customer base and ensuring to comply with regulations, while Fintechs will provide their innovative products and business models to improve banks offerings either as partnerships or as white-label products
Additionally, benefited by the bank’s endorsement, fintechs would gain the customer’s trust, and therefore launch their products to a large scale. By 2015, this model took off and reached 24.6 BN USD in agreements. According to an analysis conducted by Capgemini, the collaboration models develop between fintechs and banks were:
The most relevant are:
- Partnership collaborations defining the boundaries between each products and services (B2C), or in the case of white-labeled products, fintechs acting as suppliers in a B2B model
- Accelerations & Funding Investments. Under this model, the banks become VC investors betting for the fintech success
In practice, several collaboration models succeeded. Some examples worth to mention are: Santander created an incubator called Innoventures, in which fintechs innovations are contributing to a major project aimed to build a Digital Bank Core. What is relevant is that this initiative is based on the customer journey concept promoted by fintechs: Instead of just being limited to grant a credit, it covers all the previous and later steps. From keeping the customer informed at any touch point with relevant content (while creating his/her digital profile), through offering accurate products and services as a “marketplace”, to finally accompany the customers afterwards (of course with cross-selling purposes)
Another interesting example is the BBVA collaboration with Atom Bank for reinventing their engagement approach with customers by gamification (which by the way is considered one of most proven strategies for hooking millennials with their financials)
Apparently, both players will contribute to each other success, but as any truce, there maybe be some pitfalls: Accelerators could mean fintechs becoming exclusive “innovation providers” for banks until they can develop in-house capabilities to offer the same products & services. Moreover, VC investments would become viable only if the business model does not interfere the core offerings of the incumbent. Nonetheless, this collaboration model arose, and several partnerships were born around the globe
Again, for those who are expecting a definition of the 2nd. wave of the fintech revolution, we could extend the prior definition into a broader concept, now we are talking about “on-demand smart financial services with global reach, collaborative with focus on the customer journey”. This definition gathers several concepts I will develop as follows:
When I state “on-demand” I wanted to empathize the fact that the “technology as a service” became more determinant that ever. This phenomenon is changing all industries as well. In fact, technology companies acknowledged the importance of this strategy in such a way, that most big tech firms are known today as “cloud companies”. Their core business and therefore their revenues are moving to the cloud
The “smart” term refers to cognitive software. Artificial intelligence and machine learning is changing drastically software development as we knew it. Now, transactional systems not only process a result based on an input, but also feeds a knowledge base, for inferring more accurate future outcomes and even more stunning, react proactively to learned events
Regarding “collaborative” aligns the fintechs and incumbents efforts into an API economy, cornerstone of modern ecosystems
Undoubtedly, the de-centralized paradigm proposed by blockchain technology, let us to think of “global reach” financial services. I won’t get deep into this topic since it would be a complete independent case of study by itself
My definition ends with “focus on the customer journey” in which, of course this is the reason why fintechs raised in the first place: We, as customers expected from a financial institution to join our life’s journey as a financial advisor, willing to prosper from the initial years, throughout the adult economically active life, to a safe retirement. Banks play a major role in our lives, but up to this date, it was only for specific finance purposes. With the advent of analytics technologies and social media, the next-customers (aka. millenials) expect tailored experiences similar as they are experimenting in other industries
During this wave, a new essential player took protagonism: regulators. Control entities, especially from developed markets, were “forced” to rethink their role. Their new challenge switched from being seen as an inhibitor, into becoming a promoter of innovators, but at the same time, ensuring and protecting the legality of brand-new financial services
Regulators also found a new opportunity for improving their mission by leveraging cutting-edge technologies: Big data and machine learning can contribute to enhance their control processes (like AML) by identifying unusual patterns or predicting criminal activities… for naming a few
For instance, the UK regulation initiative PSD2 is a great demonstration of how banks are being forced to join a democratization of the innovation of the financial services endorsed by the regulators
Stay tuned for my next article!
