The Banking Dinosaurs and the FinTech Asteroid
by Sorin Despot
Beyond the buzz, the hype, and the mildly inflated ambitions of an emerging industry, FinTech has proven its potential to spark controversy, particularly within the tightly knitted fabrics of traditional financial institutions.
Among industry leaders, reactions to ‘the FinTech revolution’ range from the casual smile of the established player that has seen it all, has done it all and has won it all to the panicky warnings raised by those who believe FinTech is the ultimate threat to traditional banking.
Are Banking Institutions Risking Extinction?
The growth of a company often determines it to abandon a major competitive advantage, in any market: flexibility; agility; the ability to swiftly adapt and transform.
In somewhat predictable or conservative markets such as banking, corporate ‘dinosaurs’ thrive, while in uber-dynamic markets such as IT&C, ultra-progressive startups with lilliputian financial resources can overturn hierarchies from one quarter to the next, and can renew or even invent entire business sectors.
Thus, it is quite understandable why the entry of companies with IT&C pedigree into the finance and banking arena may give insomnia to the boards of major traditional financial institutions. Risks vary from the extinction of the traditional financial institution to the reduction of banks to simple ‘numerical’ operators, utility companies placed in the background of a business sector completely dominated by FinTech.
How Big Is the FinTech Revolution?
So far, FinTech has been in the business of gathering the crumbs that have been falling off the global banking table. FinTech has been addressing very particular, niche functions, such as providing bank accounts to people who had never opened one before, offering digital payment services and peer-to-peer lending platforms, or making money transfers and foreign exchange transactions cheaper.
In 2016, peer-to-peer lenders made nineteen billion dollars’ worth of loans in the US alone. Sounds like a lot, doesn’t it? Well, it isn’t! A single big bank lends loads more than that every single month.
How Worried Should Banks Be?
They should be worried enough, although banks still hold a couple of great advantages over FinTech companies. Most importantly, banks have been keeping long-standing relationships with their customers, with many of us going through our entire lives as clients of a single banking institution. Additionally, banks have been the only organisations entitled to hold on to customer data.
That is… until now! Through the European Payment Services Directive (PSD2), the European Union has put forth legislation that forces banks to provide customer data to third parties when the customer requests it.
Finally, there is a clear entry path into the otherwise heavily-armored finance and banking sector. IT and digital pioneers who have been relentlessly perfecting the ‘arts’ of data-driven automation and user experience (UX), can now apply their disruptive knowledge base within the banking sector.
Last year, global FinTech investments totalled more than twenty-five billion dollars, and 2018 total investments are expected to reach record heights.
The Empire Strikes Back
A 2017 PWC survey revealed that more than forty-two per cent of banks have an active joint partnership with a FinTech, with more than half of banks around the globe developing their own FinTech products.
Undoubtedly, the European Payment Services Directive (PSD2) and other pan-European pro-open-banking legislative initiatives have opened up a wide range of opportunities for both traditional banking institutions and FinTech companies.
Who’s Really Winning?
Visa, MasterCard and other such credit card companies have already made the hardest work needed to bring the financial sector – although kicking and screaming – into the digital age. Additionally, regardless of the outcome of FinTech vs ‘dinosaurs’ market battles, the big winners of PSD2, open-banking and, in general, the winners of heavy competition in the financial market remain the credit card companies.
The privilege of meeting both the tradition of relations with large financial institutions and the benefit of working with companies that focus their development on emerging technologies places credit card companies in a powerful position in the world of finance. Such a position of power, of course, implies a strong dose of responsibility, especially in a sector that directly influences all other business sectors.
In the digital age, Visa and MasterCard are and will remain the shadow referees of the European financial and banking market.
On the Importance of UX
Twispay is a payment service provider with an IT&C pedigree and a full e-money license. This fact forced us to confront ourselves internally with the struggles and debates that the entire financial market manifests today. IT and Finance have very different business and management configurations and fundamentally distinct marketing styles.
Our Head of Product Design, Vlad Ciureanu wrote an article on data-driven ecommerce, which is one of the most widely read articles on the Twispay blog. It provides valuable info and, most importantly, actionable insights for any ecommerce entrepreneur.
Vlad's article brings into the discussion and successfully deals with one of the distinctive elements that put FinTech on the maps of megalithic industries, but also on the panic radar of traditional financial institutions: the focus on user experience.
In the coming decade, the true market arbiter will be the USER!
The market is breathing and seems to be keeping its conservative inertia, cautiously expecting disruption on multiple fronts.
And perhaps it's coming, yet to no dramatic effect regarding market standings. After all, the sign of an approaching FinTech ‘asteroid’ on the horizon of the banking ‘dinosaurs’ kingdom manifests vibrantly only through the ultra-enthusiastic prophecies of a few restless voices.
What will make the difference in the years to come will have a lot to do with the preparedness of companies to integrate emerging technologies and with their ability to hire pan-disciplinary professionals. Most importantly, the market will reward their determination to understand the needs of their users.
One more thing. I see no reason why we should go through the coming innovation-rich phases other than with smiles on our faces. After all, as the meme goes: