FinTech - a technology for the people or a breakthrough business model?

Authors: Zbigniew Waz

Everyone on board

Data from the first quarter of this year suggests a slowdown in global investments in FinTechs. According to consulting giant KPMG’s report, in the first three months of 2017, 260 transactions totaling $ 3.2 billion were closed, which is a decrease of nearly one billion compared to Q4 of the previous year . Analysts suggest that FinTech's market is maturing, which in turn gives investors moderate optimism about the possibility of harvesting the lucrative investments of the last decade. The more that this innovative sector is not dominated by startups, the more global financial institutions are eager to adopt these innovative solutions.

FinTech (financial technology) is the use of modern digital technology to meet the financial needs of customers by creating new products or ways to distribute them. Many small businesses that have been launched in the past 5 years have offered mobile payment services, online cashless transfers and express electronic loans to meet the sophisticated expectations of technologically savvy customers. There is no doubt that the described revolution undermined the old business model of large financial institutions; FinTech did for banking, what e-mail did for traditional mail; the old rules of the game have changed irreversibly, and only those companies that adapt can come out unscathed.

Fast, cheap and good

In their PwC Global FinTech Report, global consulting company PwC showed that more than 80% of financial managers surveyed consider FinTech companies as a threat to their business. At the same time, more than half of the respondents declared that adapting new technologies will be a key element of their employers' strategies for the coming years. Considering customer expectations and competition in the financial sector, a new direction of development is a must .

Customers in 2017 are accustomed to the level of service offered by online giants like Facebook, Google and Amazon. In the past decade, these companies have revolutionized customer experience and have set pioneering standards for the convenience of access to services and distribution channels. Both Facebook and Google’s users expect similar solutions in the financial industry, and bankers are listening more closely to these voices.

Retail banks are limiting their network of physical outlets, instead focusing on digital distribution channels. Internet banking integration with mobile applications are also being ramped up, and cooperation with high-speed non-cash platforms is accelerating. The investment banking sector has invested in the development of complex algorithms that deal on stock exchanges and even manage portfolios of several types of financial instruments. According to Business Insider, analysts forecast that so-called ‘robo-advisors’ will manage assets worth up to $8 billion by 2020 . Thanks to cost optimization and increased efficiency, investment banks will be able to reach a new group of customers who have not previously been interested in investing. In the case of insurance, customers benefit from cheaper premiums offered by mutual insurance companies. Insurtechs (Innovative tech start-ups in the insurance sector) are increasingly looking for mobile solutions that allow customers to easily purchase a policy or extend their protection.

Innovative solutions are an inherent element of competitive advantage in the fight for a new generation of customers. There is at least one more equally important reason why financial institutions must invest in technology.

The full time robot

Since the outbreak of the financial crisis in 2008, regulatory oversight of banks has been significantly tightened. Reforms such as Dodd Frank, FATCA, MiFID have significantly reduced the ability of private equity investments by investment banks. The enforcement of a number of new anti-money laundering and terrorist financing regulations forced financial institutions to build back-office teams, which in turn has had an impact on the increase in operating costs and an increase in transaction time. It is estimated that the sum of legal compliance expenses for a large bank can amount to as much as $ 4 billion a year. Facing these challenges and shrinking margins, the use of new technologies to streamline operations is an absolute necessity. The artificial intelligence and automation tools that replace bank employees in repetitive, manual tasks has become a standard in the market. In addition to saving, other automation benefits include lowering operational risk and gaining flexibility in managing production capacity, depending on market trends.

FinTech is a high-stakes game that can be enjoyed by customers, employees and shareholders alike. So, who loses? Anyone that does not adapt to the new rules of the game or even those that explore the turbulent waters of technological innovation in the finance sector a little too late.