2016 Financial Services Trends
FinTech startups are disrupting the financial-services industry. To respond effectively, incumbents must create new business ecosystems.
This year, the banking industry faces a notable challenge that it can no longer attempt to downplay — one that can be summed up in a single word: FinTech. A shortened form of financial technology, FinTech is not new but in the past it referred to a group of seemingly modest startups offering limited online lending or retail-payment services. Now, this group is entering the mainstream, rapidly and voraciously. FinTech companies are no longer mere startups; some, like Lending Club, have become household names; others include such giants as Apple, Google, and Samsung. 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 FinTech companies, for example, are developing next-generation robo-advisors that better define 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.
So far, most incumbent financial institutions have responded to the FinTech challenge in one of three ways. All three responses are inadequate. The first group have adopted a wait-and-see approach, conserving their resources until clear technology winners emerge. They risk being caught unprepared when the threat to their business becomes more imminent. The second group have acquired FinTech firms to gain access to new technologies. But they have often had trouble with integration.
And then there are the 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.
A strategy to put your company in a better position to succeed: Become the dynamic center of a FinTech ecosystem.
If you are a financial-services executive, you no doubt are wary — and rightfully so — of all these tactics, because of their obvious downsides. We believe that there is a 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 for innovation that can support or expand upon your organization’s 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. One flagship course could be called Innovation 101; it covers the value of new ideas and creativity, and how to respond to a shifting marketplace.
You must set high service and brand metrics to guide the selection of new technologies to embrace.
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 a hodgepodge of frustrating customer experiences. For that reason, you must set high standards for customer interactions and be able to draw a comprehensive picture of customer 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 implemented a service-oriented architecture that plugs a variety of front ends (including all the bank’s customer interfaces) into common data sources and applications that the firm maintains. In our view, becoming the center of a FinTech ecosystem takes this service-oriented approach only one step further (though, granted, it is a big step). Instead of inserting front ends into the platform, you knit together links 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.
This paper is part of PwC’s global focus on FinTech and will be followed in March by a unique and comprehensive global survey of over 500 respondents looking at current and emerging trends in FinTech and providing insight and analysis into why FinTech is different and how organizations can and should respond to the challenge.