Winds Of Disruption or Bust– FinTech Vs. Big Banks: Create Financial Services Business Model for 21st Century…

Winds of change in financial services is gaining in strength as financial technology companies (FinTech) strive to alter the industry with digital technology, smartphones, apps… their purpose is to make financial services– more efficient, easier access, more cost-effective… and they are currently targeting specific sectors, such as; payments, loans, wealth management, currency exchange…

Some suggest; it’s not an exaggeration that within next 10 years the banking industry will become almost unrecognizable due to emergence of FinTech… FinTech is in midst of golden age of investment, innovation… but some see it as both– boom or bust opportunity…

According to Saikat Chaudhuri; FinTech,  for most part, is nothing new– they apply new digital technology to existing financial applications; this is not a new revolution in financial services, but it’s a recognition that financial services needs a new business model…

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Globally, the FinTech cycle is still developing and it’s highly anticipated that a shakeout of both the technologies and companies are inevitable… According to Mr. Flowers; most prolific area currently for FinTech is in unsecured consumer loans (also, payments, currency exchange)– these are areas of lesser importance to most banks– but literally hundreds of FinTech companies are chasing these apps, and that means that (sooner rather than later) a ‘shake-up’ is probably brewing…

According to Citigroup; about 1% of North American consumer banking revenue has shifted to new digital business models, and it forecasts that figure will rise to 10% by 2020 and 17% by 2023… Whereas in China, 96% of all online sales are conducted without a bank, and the shift is already well underway where the top FinTech companies in China have as many, or more clients than biggest banks…

In the article Is FinTech Here to Stay? by Serguei Netessine writes: 2015 was the best year for ‘venture’ investment in U.S. FinTech start-ups since 2000, with $21.6 billion invested, but the number of deals fell for first time since 2009… There are more than 5000 FinTech start-ups in the world… and many unicorns are emerging among them. There are now about 50 FinTech-unicorns (firms valued at more than $1 billion) on the loose…

This staggering growth is a reflection of the hype around FinTech, where a plethora of start-ups are using digital technology to compete against or collaborate with established financial services players. The result is dramatic increase in valuations of start-ups as investors look to get in on the ground floor of the ‘next’ big thing…

These start-ups are engaged in an array of financial services– from payments, to lending, to wealth management… aiming to grab a slice of revenues that Goldman Sachs estimates is worth $4.7 trillion… According to a report by McKinsey & Co.; whether FinTech makes a significant dent in global finance, or not will depend what happens in 2016 and 2017, which are pivotal years for the future of the sector…

Over the next 12 to 18 months, many of these start-ups will probably fail, and a clearer picture will begin to evolve on the viability, sustainability of the sector… Nevertheless– investors, analysts, banks… still see digital technology innovation as the future of financial services… Many big banks are well aware that they must reinvent their business models, or other players will do it for them…

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In the article FinTech And Big Banks by Andrew Ross Sorkin writes: The real threat to banks is not from Washington D.C. or Brussels, but from start-ups all over the world that are chipping away at parts of their financial services industry… According to a Citigroup report; FinTech may be on the cusp of an ‘Uber’ moment– changing foundation of an industry… but the down-side is that some 800,000 people could loss jobs at financial services companies due to the new technologies…

Roughly 60 to 70% of retail banking employees are doing manual-processing-driven jobs, and if (or, is it ‘when’) all the current manual processing are replaced by automation these jobs will disappear… In addition, ripple effects are enormous, e.g.; consider not just employees but impact on commercial real estate– when banks close thousands of branch locations throughout the nation, and the world– the economic fallout is huge…

In contrast there are others who are less convinced, and they say the FinTech movement is simply ‘hype’ that defies common sense… and instead of displaced employees and closed banks there will be hundred of failed FinTech companies… And still another view of the FinTech phenomenon, which in fact may have the highest likelihood of coming true is the following: Big banks become so paranoid about the possibility of being disrupted, by FinTech these up-starts that they either; buy the most innovative of these firms, or at least hire the most innovate people from these firms– so that they themselves become disruptors of their own industry… 

In the article FinTechs Are Over-Rated by blogjoh writes: There is nothing disruptive about FinTech! They use digital technology to serve niche markets, but ‘functionally’ there is nothing new or disruptive about their offering, which is not or cannot be provided by banks. However, there is one component that these start-ups provide which can justify all the hype; it’s the ‘outstanding user experience’ of their products (which means design and usability).

FinTechs are not revolutionizing banking, but they are revolutionizing the way consumers experience banking… FinTechs are challenging the established banks by delivering better experience, i.e.; by making it simpler and easy to use financial services through; easy to use apps, smooth navigation, simple pricing models…

FinTech is not ‘Uber or AirBnB’ moment (i.e.; attacking the infrastructure of an industry) instead these companies use– existing framework to offer better/different services… Nevertheless, these players are important– they are showing the banking establishment that they must be more innovative, more modern, and provide better user experience…

However, there is a natural synergy for partnerships between banks and FinTechs; where banks provide the infrastructure and FinTechs provide the digital technology… and when the execution is done properly all three are winners; customers, banks, FinTechs… it’s about reinventing banking for the 21st century…

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But banks must act quickly to position themselves as the future of the financial services industry or become irrelevant… they must embrace digital technology, smartphones, apps… and reinvent their business models… According to most experts; the ‘era of FinTech’ is here and banks must develop a clear plan in order to adapt and benefit from FinTech-fuelled changes. While the banking industry is traditionally more ‘conservative’ to change– and certainly when change is fast-moving– any hesitation or ambivalence could be very costly, particularly as new technology introduces; not just new solutions but also potential new contenders to banking establishment…

According to ‘FinTech Adoption Report’ by Ernst & Young: Traditional financial services firms can learn from how FinTechs ‘think’ about the customer proposition and how they are harnessing technology to deliver value, convenience… Early FinTech adopters tend to be customers who are– younger, higher-income, and concentrated in urban areas, such as; New York, Hong Kong, London…

These are some of banking most valuable customer, hence traditional banking services must; understand and personalize services for the new demographics, as well as, educating traditional customers in the ways of digital financial services… This requires evaluating traditional banking services and delivery strategies, as well as, exploring partnerships with FinTech providers…

Banks and financial services companies must learn the lessons of FinTech… According to a survey on FinTech usage– respondents cited the following; overwhelmingly the top reason for using FinTech was its relative ease in setting-up an account… also, more attractive rates, access to different products and services, and better online experience were also very popular responses… but, ‘simplicity’ was the primary factor driving adoption… While many traditional banks are grappling with how to replace– cumbersome and time-consuming account set-up– FinTech are enabling customers accounts with as little as ‘one’ click.

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It’s clear that a digital revolution in financial services is under way, but the impact on current banking players is not fully understood… FinTech has the potential to shrink the role and relevance of today’s banks, and simultaneously help them create– better, faster, cheaper… services that make them an even more essential part of everyday life for institutions and individuals…

And to their credit, banks are acknowledging that they need to shake themselves out of institutional complacency and recognize that merely navigating waves of regulation and waiting for interest rates to rise won’t protect them from obsolescence… Banks are beginning to embrace the lessons of FinTech with a sense of commitment and purpose to re-imagine their business models…

But the future of FinTech companies, as disruptors of financial services, all depends on the banks themselves and how they react to the FinTech challenge… Banks, it’s your move!