FinTech: a threat to the traditional banking industry?

FinTech’s battle against the old

Digital disruption is sweeping the UK finance industry, as the country has seen an exponential growth of FinTech businesses from a handful number to around 61,000 since 2008. With the size of Hong Kong, Singapore and Australia combined together, Britain is the FinTech capital of the world. Last year, FinTech startups have raised almost $12.4 billion from venture investments, according to Time.

Moving away from the traditional methods, FinTech presents a much more efficient, transparent and convenient way of financing using cutting-edge digital platforms. With the combination of technology, innovation and big data, FinTech firms are capable of delivering customer-centred services at a more affordable and accessible manner than the established financial institutions.  In other words, it is ‘sapping away’ the existing big players.

The rising stars of FinTech

To understand how FinTech businesses ‘disrupt’ the market, here are a few examples of emerging FinTech leaders.

• Square – Perhaps the most recognised FinTech firm, Square revolutionised mobile payments with their innovative smartphone card swiper tech.

• Transferwise – using the peer-to-peer system, it matches people based on the currency they have and require, cutting down expensive bank fees. 

• Acorns and Mint – personal finance apps that simplify investing and help users track and manage their spending and budgets. 

• eToro – one of the largest and leading social media platforms for investors, allowing users to see, follow and mimic their peers’ actions in real time.
• FangDD – the first ‘pay-for-performance’ based online real estate information platform connecting property sellers and buyers.

Ok, so how have financial institutions reacted so far?

The financial digital revolution will unquestionably alter our relationships with the banks. But its impact on the big players is not black and white. Nevertheless, the traditional banks have reacted to recover profits and mitigate threats of FinTech businesses by ‘charging more for low-margin services, closing bank branches to cut cost, acquiring FinTech companies’, according to the Time.com.

Not to mention that such approach will hard hit the low-income households, it will unlikely to reconnect to the customers, particularly the millennials who are shifting away from banks to FinTech firms. Having said that, that has not yet rendered banks obsolete or irrelevant.

Two possible futures for banks

Accenture’s report has predicted two possible scenarios in the face of better, faster and cheaper Fintech services that have been quickly adopted by organisations and consumers.

Scenario 1: Digitally Disrupted – as banks lose their profitability to the more effective FinTech companies in the digital age, they will continue to offer a product-based sales approach rather than to improve the customer experience.

scenario 2: Digitally Reimagined – banks will increasingly integrate innovations at the business model level. Their focus will shift from asset monopolies to improving a customer’s life.  

As digital is an inherent part of our life, banks will need to embed and implement their digital strategies more promptly and effectively, which inevitably involve some drastic changes at the organisational level. However, the same survey also revealed that ‘four out of five respondents felt that when it came to culture and talent, they were only “somewhat” or “minimally” equipped for the digital age’.   

Three key behaviours that will beef up the bank’s digital strategies

So now, what and how can a bank gear its future towards the second scenario? According to the same report, here are the three key points:

• Act open: For long established banks, this means to engage with outside resources such as external digital solution companies at an early stage. It often entails opening up of the organisation’s own intellectual property assets to the external agencies to create a completely new idea and competitive edge.

• Collaborate: Collaboration is also becoming more critical within financial sectors. ‘The big challenge for established players is their organisational culture’s ability to adopt a collaborative approach with new innovators and start-ups’, says the report.

• Invest: Last but not least, more venture investing to FinTech startups could potentially help ‘the innovation flow back’ to those who are funding it.

Key takeaways

The rise of FinTech companies will somehow likely to affect the profitability of well-established banks. They’re more efficient, innovative and transparent, making it much easier to connect with customers. The future of banks will depend on the synergy of new technologies and their underlying competitive advantage, ie, customer insights (or big data), to recoup the profitability.