An introduction by Michael Mellinghoff, London
The finance sector is in the midst of a profound transformation. Technological, economic and social developments enable entrepreneurs to develop and successfully market financial solutions, that are much cheaper and faster than the incumbent solutions. Innovation in banks has been hindered by the size of the organization, their hierarchies, internal silos, and limitation in management’s foresight with respect to digital competition. Many banks lacked an R&D department!
Certainly, the trend to (over)regulate, since 2007 has not helped. The top management has been busy firefighting most of the time, while many Fintech startups were founded globally since the banking crisis.
In order to gain public attention, Fintech startups threatened to disrupt the banking world. This frightened the banks initially, however they did not perceive these tiny companies to be serious competition. Some of the early movers managed to grow globally: PayPal snatched away payment – the primary touch point of many retail banks with their clients. This was the first major blow to the banking world.
After the (short) “we disrupt you" phase, Fintech startups and banks both realised that a collaboration between the two is beneficial for both. Why? Startups realized that acquiring clients is not easy, while many banks figured that innovating with the help of startups had its appeal.
While a few disruptive Fintech approaches indeed pose fierce competition, banks use enterprise Fintech firms in order to fight them.
In a truly digital world, banking would become invisible. The need for bricks and mortar branches would vanish, with payment processes being executed by an IoT-connected device, the swipe of a finger in a supermarket or a 1-click-buy with AmazonPay. Amazon, which started as an online bookselling website in the US now de facto owns retail in the Western hemisphere and – more importantly – client access. This is the second big blow to the financial services industry and only in March
Next and maybe the most critical battlefield is the identification of clients and user bases. Is client identification the new business model of banks? Or will GAFAS be quicker with this (too)? Or will (a) Blockchain take over this job?
Does this mean, "game over" now for banks? No, it doesn’t. Financial services providers are still the most important gatekeepers to the financial needs of clients, they are trusted brands and have – again - relatively solid balance-sheets, with cash-generating business models which allow them to invest in the future. It’s obvious that Fintech solutions will play an inevitable role here as digitization is a global megatrend. A trend which will turn surviving banks from risk avoiders to risk takers. But will the reward for this additional risk be big enough?
The challenges of the incumbent financial world mentioned are the opportunities for fintech entrepreneurs.