Globalisation and digital disruption have become unlikely allies in shaking the traditional foundation of banking industries whose profits have long been based on regulations and interest rates. After all, the new generation of Fintech companies are no longer confined by proprietary software limitationsand can now leverage on the exponential increase in Internet usage and speed, mobile and social technologies, open source software, crowd sourcing, cloud computing and Big Data to introduce new market innovative solutions that could never have been made possible as recent as a decade ago. Fintech is now popular again as it offers banking tech. solutions that are positively more accessible at a faster rate and with better user experience.
Ultimately, existing banking players must adapt to the rise of financial-technology services which offer a wider range of financial services at a lower cost, faster rate and flexibility to scale according to the business growth.
"Leveraging on new investments can be difficult when banks have already invested so much in legacy systems and profit centres "
However, it is unlikely that the start-ups and new players in the Fintech industry will cause banks to lose a large portion of the market. Instead, we predict that forward thinking banks will adapt to the opportunity by pivoting their customer approach to focus more on delighting customers with better service and experience, as opposed to the traditional fast-following strategy of approaching each client as an opportunity to make a product-based pitch. In exciting times like these, it will be interesting to observe how the banking industry will work with Fintech companies to offer added-value services to the customers.
API as a Gateway to Open Innovation
Top secret intellectual properties, assets and proprietary software are now being replaced with Application Programming Interfaces (APIs) that can connect one banking platform to third parties. Companies have leveraged on APIs to offer their merchants access to cross-border transactions in multiple currencies, invoicing, POS and connection to existing core platforms of other software. Eventually it is being predicted that the practice of integrating different types of services together will become a norm not only for banks, but for leading solution providers around the world. In the banking industry, we will see more institutions replace proprietary source code with open technical innovation activities and to do so successfully, banks must work with developers and specialists in the Fintech industry with knowledge of bank regulations as well as technology savviness.
Ignore, Acquire, Partner or Compete?
The bank with the most strategic partnerships will flourish in the age of digital disruption, and there are no better candidates to partner with than those in the radical Fintech start-up scene. While many may view the David and Goliath collaboration as a risky strategic decision, the value of working with start-ups is that it will initiate new business ideas that could never have occurred from within the banking organisation."
" Leveraging on new investments can be difficult when banks have already invested so much in legacy systems and profit centres"
In Australia, the federal government has embraced the potential of incubating Fintech companies as evident, in their support of funding the Fintech initiative in Asia. In the past 3 years, 43% of the world’s leading banks have also chosen to incubate Fintech companies in hopes of developing a “unicorn” start-up whereas, another 50% of banks have either partnered, acquired or set up venture funds for Fintech companies.
The Problem with Fintech
Fintech has become synonymous with the fast technology that can provide financial solutions at marginal costs and it is true that in terms of banking solutions, it will be the catalyst to change the nature of almost every financial activity currently performed, from banking to wealth management.
To be completely accepted/integrated into the banking institution, there are some aspects that companies in the Fintech industry must overcome; the first and foremost obvious being conflict management between a business model that’s build on Agile Methodology versus an incumbent institution that has always believed in a silo operation. In theory, the benefits of renovating a business model to suit the latest innovation would be tempting but the simple truth is that, leveraging on new investments can be difficult when banks have already invested so much in legacy systems and profit centres.
Fintech companies also have their own challenges, which mainly revolve around working with a limited amount of resources to keep up with a rapidly changing regulatory landscape. This is on top of managing cyber risk and fraud protection as financial services are understandably more prone to security exploitation.
Regardless of the tech-solutions chosen to enhance or further improve banking services, the one issue banks must first address is their approach in decommissioning legacy technology while also deploying new tech solutions across the board as to avoid providing no net value or worse yet, negatively impacting the value of the solution. Fintech companies must not only argue the cost effectiveness of their services but also help banks answer the basic questions such as why, what and how they are improving their services, all the while assuring scalability and protection against risk.