FinTech: A Conceptual Way of Doing Business
* The article was initially published on our blog.
Description: From disruptive threat to enabling partner, FinTech has entered a new phase of its evolution. In this article, we discuss how incumbents, startups, investors adapt to the maturing ecosystem shifting their focus from defense to perception.
Digital reality and cognitive technologies of many types including AI, Machine Learning, Robotic Process Automation, Natural Language Processing, and Neural Networks gave rise to a new wave of non-traditional financial organizations that explored cutting-edge technology advancements to foster their business initiative.
Over the past decades, these techy trailblazers have moved from fledgling siloed capabilities to the heart of financial sector changing every facet from healthcare and insurance to banking and capital markets to financial investment, lending and real estate. At the edge of digital transformation, FinTech companies drive a multi-million-dollar IT-led program, in which systems and processes are aligned to a new concurrent corporate strategy.
More agile than longstanding incumbents, FinTechs are re-engineering existing business models in a way that delivers quantum leaps in productivity while dominating investors priority. No wonder, these challenges were eventually heralded as disruptive competitors that grab significant market share, perhaps even driving some well-known players into irrelevance.
But is it true? The answer depends on the attitude towards FinTech that swings from an aggressive takeover to a possible extension of the company’s partner network.
FinTech Formation 2.0
There has been a gold rush when it comes to FinTech formations over the past 10 years. The Venture Scanner data shows that from 2008 through 2018, more than 2, 800 of newborn FinTech startups entered the industry. The majority refers to banking and capital markets while the second most FinTech-friendly sector is insurance. Yet FinTechs have been gearing into several other tracks, like mortgage applications, regulation and even the purchasing of real estate, thus giving a whole new set of investment options.
Along with a staggering number of FinTech openings comes statistics for industry partnerships even more impressive. The recent findings of KPMG FinTech Agency reveal that corporate VC investment in FinTech for 2018 of $23.1 billion nearly doubled the previous high of $11.6 billion seen in 2016, with the number of corporate FinTech deals growing for the eighth successive year.
Increasing corporate participation highlights FinTech onboarding both traditional financial institutions and a wide range of companies outside of the financial services industry through the direct acquisition of FinTech companies or by forming partner-enable models with financial institutions.
For the last 5 years, total investment activity including VC, PE, and M&A has been swiftly growing with 2018 hit the all-time height of $111.8 billion being invested in FinTechs worldwide.
As can be seen from the figure above, M&A activity is clearly being propelled higher and higher throughout the years by some mega-deals due to consolidation and via the growing incidence of incumbent giants purchasing FinTech startups. Global venture capital investment in FinTech gains traction as well and its growing popularity over time is undeniable.
It means that from a massive technology threat FinTech is growing into a reliable partner. This transformation led some more advanced FinTechs to make their own investments as part of their drive to expand either geographically or on a product basis and in some cases, partnering with or taking investment from financial services incumbents.
On the Way to Success
In contrast to the world’s biggest institutions that struggle to maintain equal-quality services over multiple financial domains, the new breed of FinTechs challengers divide and conquer — they are showing in certain segments that they can do trading better, they can do credit better, they can do person-to-person payments better. And if these financial corporations do not follow suit, then they will start to lose customers.
Think about consumer lending — in the past, underwriters had minimal data with which to rate risk for a loan. It ended up meaning many people were turned down or charged a higher interest rate. Consumers saw their credit score as a mysterious number only accessible by financial institutions. You might be surprised to know that nowadays some banks and investment houses operate same old risk-asserting models with customer’s credit history remains the crucial factor for decision-making.
Even though the credit industry is rapidly changing, and consumers can easily obtain their credit score with only a few clicks, they are left baffled by the lack of information supporting that number — specifically, how it was formed, what it really means, and how to improve it.
Now, robotic technology provides opportunities to help both average consumers and credit industry-based businesses. Robotics is using data and analytics to inform consumers which actions can affect their credit scores while giving financial institutions and others in the credit space opportunities to offer credit lifecycle solutions.
After data capture a consumer’s financial goals, analytics is used to suggest actionable items to both improve the consumer’s credit and assist that person in making better financial decisions. This same technology can also be applied to loan underwriting, making it easier for lenders to create customer-specific loans that result in lower default rates.
Consumer lending is not the only industry where major banks are falling behind FinTech challengers. Scrutiny from regulatory authorities, increased costs, and weaker consumer appetite force the Big Banks to hand off key components of their mortgage business to scrappy tech startups armed with data and algorithms.
Forging their path to industry dominance, FinTechs take advantage of the latest breakthroughs in data science, machine learning algorithms, bionic underwriting and AI de-risking when they are developing own data-driven and custom-centric offerings.
FinTechs can now utilize a vast amount of information, seeing data that traditional financial services companies had never considered. It equates to having the ability to provide more people with access to personal and business capital in an industry reckoning with heightened competition, regulatory headaches, and thinning margins.
Finding the Right Technology Partnership is Key
When we are talking business, time does always matter. Many financial industry executives lost that time naysaying about the potential threat that the nontraditional technology companies posed while they could have ramped up their own investments and transformation initiatives to keep pace with the FinTech disruptors.
Traditional financial institutions may be late to the FinTech party, but they haven’t completely missed the boat. Some big-time heavy hitters created their own services. JP Morgan, to cite one example, has accepted the disruptive movement and is now capable of bringing new sets of services to their clients.
Nevertheless, most of the incumbent financial institutions did not have available resources to develop an independent technology hub, or they just lacked the “secret sauce” that makes innovation go.
But most major banks haven’t completely capitulated, but rather they’ve teamed up with a digital provider to gain an edge. At the same time, many FinTechs themselves have sought to join large financial institutions to expand into markets, gain industry and regulatory knowledge, and even simply cash out.
There are now many examples of this new financial services ecosystem in action, with FinTechs and traditional financial institutions working together in a variety of ways.
For example, Wells Fargo has turned to Blend, a startup offering lenders a platform fortified by machine learning that automates and streamlines home loans into a smartphone-friendly setup. JPMorgan Chase last year enlisted Roostify, a Blend competitor, to build a “digital, self-service mortgage platform,” as did TD Bank.
Speaking of today’s FinTech market, Global Co-Leader of FinTech KPMG International, Anton Ruddenklau said:
“The FinTech industry is particularly resilient, partly because of the very strong participation of corporates. In 2018, we saw corporate VC investment more than double, while corporates also drove a large degree of the M&A activity. And it’s not just the traditional financial institutions getting involved in FinTech deals.
Globally, many of the big tech giants are also investing in FinTech. Even when other investors might be more cautious heading into 2019, corporate participation will likely remain strong as they are primarily investing for strategic reasons.”
In other words, even one of the largest and highest-rated financial institutions in the US are actively pumping their funds to an upstart with more digital sophistication in an effort to gain ground in the challenging FinTech market.
Afterword
“Machine learning” and “automation” have become gimmicky buzzwords in some corners, but in the financial services industry, the technologies are fast becoming basic competitive requirements. Banks without a top-flight digital offering risk falling behind and ceding market share. In the meanwhile, our experience and current market scope suggest that a higher level of digital maturity is correlated with above-average financial performance.
Armada Labs strives to keep your company fresh and modern, translating the execution of digital transformation programs into tangible impact. Our prime industry knowledge helps us embrace and understand what’s happening in technology and then we create solutions that stay relevant and evolve with our customers’ needs. In 2019, our innovation pivots include:
- Automated Underwriting, AI De-Risking, Machine Learning Credit Scoring Systems;
- Chatbot Payment Tools, Natural Language Processing Communication Models;
- Cloud Technology Architecture, Alternative Data Sources, and Blockchain Database.
Drop us a line to see how we can help you navigate the ever-changing world of financial technology.
