Meeting the Fintech Challenge
How incumbent banks can respond to the startups and other firms disrupting their industry.
A few years ago, a group of seemingly modest startups began offering consumers limited online lending or retail-payment services. Called fintechs, they operated in the margins and didn’t pose an obvious threat to established financial-services companies. But today, fintechs are rapidly entering the mainstream. Some startups, like Lending Club, have become household names. And more established tech companies, including Apple, Google, and Samsung, have also begun to offer fintech applications.
Each delivers (or plans to deliver) highly focused financial-services applications, often more effectively and less expensively than traditional companies. They have been attracting customers in larger numbers. And incumbent financial-services firms have had no choice but to take notice.
In such fields as online lending, money transfer, and credit ratings, fintech companies are breaking the dominance of financial services’ largest players in novel ways. Some fintechs, for example, are developing next-generation robo-advisors that better design savings solutions on the basis of goals and risk appetite without a bias toward any particular product. One fintech innovator has engineered a new method for capturing and sifting data to spot fraud and monitor trading activity — a formula it had originally designed for medical cancer screening. In a sign of just how significant fintech has become, global funding of fintech startups in the first three quarters of 2015 reached US$11.2 billion, nearly double the funding of the full year before, according to CB Insights.
One fintech innovator has engineered a new method for capturing and sifting data to spot fraud.
So far, most incumbent financial institutions have responded to the fintech challenge in one of three ways. The first group has adopted a wait-and-see approach, conserving resources until clear technology winners emerge. These firms risk being caught unprepared when the threat to their business becomes more imminent. The second group has acquired fintech firms to gain access to new technologies. But they have often had trouble with integration.
The third group includes companies investing significant time and money in fixing their own existing IT landscape, which is typically fragmented and complicated by legacy systems that are hard to maintain, upgrade, and improve. Many of these institutions hope to replicate fintech’s approach internally by establishing innovative, agile teams to develop new offerings rapidly, with an emphasis on digital features, such as mobile, social media, and data analytics. But these internal teams are saddled with decades-old infrastructure, regulatory burdens, and entrenched interests. Although earmarking more funds for IT improvements is a constructive activity for most organizations, it pales as a response to the emergence of fintech. It’s difficult for firmly rooted IT departments to be as agile as fintech startups.
If you are a financial-services executive, you may be wary — and rightfully so — of all these tactics. There is, fortunately, one more strategy you can employ that will borrow certain useful aspects of these approaches while putting your company in a better position to succeed: Reorient your firm as the dynamic center of a fintech ecosystem. Instead of managing the entire customer experience through your bank’s legacy systems and processes, you should make the most of your position of trust with your customers, your access to customer data, and your knowledge of the regulatory environment. Explore the financial technologies around you with an eye to finding new products that you can fit together distinctively and make available to your consumers.
Rather than expending resources on in-house product development or basing your R&D investment on a prediction of the future contours of an industry in flux, this approach involves looking outward: assessing third-party technology providers based on what they offer and how well you might partner with them, choosing software and apps that fit your financial institution’s business criteria, and interfacing with the providers to quickly offer their solutions as part of a coherent integrated product. Focus on what your own company does best — for instance, identifying investment themes, assessing credit exposure, managing counterparty risk, or executing and settling financial transactions. And then tap into the fintech pool, by establishing partnerships, to gain access to innovation that can support or expand your organization’s core market.
Tap into the fintech pool to gain access to innovation that can support or expand your core market.
Make no mistake: For many traditional financial institutions, this strategy will require a fundamental shift in identity and purpose. Your organization’s culture must change from “protecting my turf” — that is, defending your existing products, services, and customer relationships — to a culture that is forward looking, that responds to customer demands relatively quickly, and that can adopt new technologies as they evolve.
You will probably need to develop a new institutional capability to constantly screen new technologies, decide which make the cut and which do not, and then plug these pieces into your information technology architecture (and that of the other companies in your technological ecosystem). Elements of this capability would include granular insight into customer preferences, the ability to partner efficiently with external companies, the facility to integrate new technologies, and the managerial skill to undo those integrations when better technologies emerge.
Some established companies are taking steps in this direction. For example, one large international bank is trying to modernize its culture by making significant investments in training programs for its 100,000 employees. A flagship course could be called Innovation 101; it covers the value of new ideas and creativity, and how to respond to a shifting marketplace.
Changing any business model is difficult; transforming into a fintech-focused organization is also potentially harmful. If mishandled, the transformation could lead to brand erosion. Quickly integrating a raft of different technologies and new products, while raising the learning curve for account holders and employees, could easily produce frustrating customer experiences. For that reason, you must set high standards for customer interactions and be able to draw a comprehensive picture of people’s expectations for the firm’s brand. Your service and brand metrics should serve as primary guidelines for choosing new technologies to embrace.
Because this approach to fintech will cut to the very heart of the organization, its management cannot reside strictly in the technology group. Technology planning must become integral to C-suite discussions. Nontechnology executives on your team will need to become more tech savvy than is typical of most business managers in the industry.
The good news is that incumbent financial institutions have been, perhaps unintentionally, laying important groundwork for this technology shift for several years. It is now a financial-services industry maxim that companies must break down internal silos and do a better job of sharing customer data throughout the organization. To achieve this shift, many companies have created centralized databases that maintain account and transactional information in a form that is accessible throughout the organization as needed to power customer apps, support up-selling and cross-selling campaigns, and analyze economic trends and consumer behavior, among many other objectives. Becoming the center of a fintech ecosystem takes this so-called service-oriented technology architecture only one step further (though, granted, it is a big step). Instead of connecting internal servers and computers to the network, you knit together links from the network to disparate external players.
Given how fast financial technology and consumer tastes change, incumbent financial institutions cannot afford to ignore fintech. A bold response to the fintech challenge is within your reach, no matter how slow you have been in the past. With a little bit of planning, a lot of focus, and some good relationships with outside innovators, you can place your firm at the center of customer activities. This will give you a position of strength, no matter what new innovation is waiting around the next corner. You might not know precisely what the financial industry will look like in the coming years, but you will be certain to be in the middle of it.
- Steve Davies is PwC’s U.K. and EMEA fintech leader. He has built an EMEA fintech practice that focuses on supporting and incubating startups, building a blockchain business, using robo-advice technologies, and fostering access and connectivity between small start-ups and larger traditional clients.
- Manoj Kashyap is a partner with PwC US, based in San Francisco, and also serves as the firm’s global fintech leader. A leading practitioner in the financial-services industry, he has worked extensively with a large range of institutions across banking, auto finance, asset management, and insurance.
- Joerg Ruetschi is a specialist in the strategic and structural transformation of banking and capital market businesses for Strategy&, PwC’s strategy consulting business. He is a director with PwC UK, based in London.
- Also contributing to this article was Martin Roets, a director with PwC UK, Strategy&.