Is Fintech a Disruptor or an Enabler for the Big Banks?

This article was written by Adinah Brown from Leverate.

Ever ubiquitous, in 2016 the term 'fintech' appeared in the global print media 90,000 times and multiple times that in social media. However this hype has not been limited to the domain of text, as the arena has also exploded with a burst of fintech startup investment portfolios. In a study conducted by Citigroup in 2015, they found that fintech investments topped $19 billion, which represents a tenfold increase from 2010.

The London Summit is coming, get involved!

Sprouting like daffodils across the globe, fintech startups are roughly classified as any business with a primary focus on finance. This can include Payments Payments One of the bases of mediums of exchange in the modern world, a payment constitutes the transfer of a legal currency or equivalent from one party in exchange for goods or services to another entity. The payments industry has become a fixture of modern commerce, though the players involved and means of exchange have dramatically shifted over time.In particular, a party making a payment is referred to as a payer, with the payee reflecting the individual or entity receiving the payment. Most commonl One of the bases of mediums of exchange in the modern world, a payment constitutes the transfer of a legal currency or equivalent from one party in exchange for goods or services to another entity. The payments industry has become a fixture of modern commerce, though the players involved and means of exchange have dramatically shifted over time.In particular, a party making a payment is referred to as a payer, with the payee reflecting the individual or entity receiving the payment. Most commonl Read this Term (such as digital wallets and Cryptocurrencies Cryptocurrencies By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the netw By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the netw Read this Term), financing (e.g. crowdfunding and peer-to-peer lending), investments (e.g. robo advisers and social trading), insurance (e.g. insuretech and social insurance) and infrastructure (trading platforms and currency feeds).

Pros and Cons

However for established legacy banking, is this all a good thing or a bad thing? Do fintech startups look to be a disruptor or an enabler for the established big banks? The argument towards fintech being perceived as a disruptor is largely due to the fact that fintech start-ups have the freedom to be a lot more nimble. They are not burdened down with legacy technology systems and restrictive regulations. Both of which limit the scope of digital development that can be achieved by an established financial service firm.

This means that start-up companies have the freedom to more efficiently and creatively build mobile focused services or products that make them comparatively more appealing than the big banks. For example mobile-based banks have emerged in the past year, such as Monzo, Starling, Tandem and Atom, all of which offer accounts that allow customers to manage their money and lifestyle.

These fintech companies have all been successful because they have focused their efforts on building services that fill in the gaps left by the big banks. Increasingly, customers want to be able to manage their finances themselves, whilst on the go and with investment expertise, and these emerging fintech companies allow them to do just that.

Fintech groups also pursue a range of important operations, from sending international payments, to trading on the stock markets to applying for a mortgage via video link. Presently, there are also trading platforms, both on web and mobile, which make investment expertise accessible to people at varying levels of experience and skill. This attracts many traders, who on the one hand could not afford to pay for the advice from a broker, but at the same time, know that they don’t have the experience and knowledge to do it alone.

Yet, there are many who are of the contrasting opinion that fintech developments are set to be an enabler for established financial service companies. In possession of enormous capital, they are in a position to invest in these technologies and take a more innovative approach towards attracting new customers, cut costs and boost profits.

Firstly, banks can take advantage of the technology being produced to reduce their own expenses and increase their efficiency. By transporting their customers to a digital offering, banks could reduce physical branches and optimize their staff’s productivity, without compromising their standard of customer service.

Pain Points

The emergence of fintech has motivated banks to consider their pain points, in ways which may be solved through technological innovation. For example, instead of going into a bank to deposit an overseas check, customers instead can deposit it using their phone.

Yet not just limited to the realm of cost savings, banks can also look at fintech in terms of finding ways to increase their revenues. Automated conversion tools can make it possible for banks to target new customers and expand into foreign markets with fewer impediments in regards to resource limitations.

According to Guy Paz, Chief of Technical Operations at Leverate: “The biggest challenges faced by banks are their legacy computer systems, which are costly to maintain and present operational risks. Fintech is predisposed to provide a solution, as it tends to offer user-friendly programs that have been developed from the latest concepts in design thinking and technology. For customers, these programs are appealing and attractive, while for the banks they represent an edge of competitive advantage.”

Additionally, banks can look to fintech as a means to enable their revenue growth with higher margin and through less capital-intensive programs, such as insurance or wealth management. By incorporating fintech applications such as robo-advisers and automation into their operational model, they then have the means to scale their business more rapidly to provide services to clients that beforehand were not profitable or were too taxing on their customer service systems.

Instead of fighting, or denying, the trend, the best option for big banks is to go with the flow by incorporating the innovative technology being developed by fintech startups into their own operations as much as possible. The reality is it’s not all smooth sailing for the startups either, as they typically lack the expertise in regulatory compliance and risk management that is required to make their products relevant for the long term. Partnering with an established bank can therefore mean a win-win solution for all.