Over the last few years, venture capital funds have poured billions into financial technology, or fintech, and the frustrated investment bankers and traders that launched the sector. But how close are we really to the complete disruption of the banking sector?
We are a lot further away from a full disruption than the media, conference organisers and thought-leaders would have us believe. But that does not mean it is not something to watch out for.
Fintech is currently an evolution rather than a revolution in re-architecting the financial sector, as the core business structure of how money moves around the world remains largely the same.
In spite of how the consumer engages at the point of payment, money still moves between banks – the bank that has the money (issuer) and the bank that receives the money (acquirer).
What fintech is doing, is creating competition at different layers. Things are changing at the customer experience level, such as the point of issue and point of transaction, but the back-end itself, which is 90 percent of the functionality, will take much longer to evolve.
Banks that are strategically aware are realising that acquiring channels will be harder to retain and issuing is where they need to focus. Therefore, we should see companies on the issuance side doing more to promote the use of their own branded credit cards as part of loyalty programmes.
The real opportunities for disruption lie on the acquiring side. Banks are going to be affected badly, especially those that overcharge for acquiring.
There are new products and services in fintech that will start eating the banks’ lunch with their own mobile point of sale devices.
Apple Pay and Google Pay will also cause banks to lose out on the acquiring chain, as these place themselves directly in the middle of consumer and bank. Once we start to see that level of core process interference, then we can start to talk about fintech as a disruption, rather than an evolution.
Financial services providers need to be very clear about their value proposition: what they are good at and where they need to partner. This is where integration comes into play – leveraging technologies to create a complete customer experience, but through partnerships and integration rather than internal developments and management.
There is a move by international banks, such as ING, to provide application programme interfaces to innovative fintech companies, exposing their “rails” so that it is easier to create new ways of interfacing with the bank. The true shift from hype to real change will be complete once fintech starts becoming part of the everyday for large, entrenched service providers and not just for small, entrepreneurial teams.
Payment partners can help banks and retailers implement and manage these new rails and interfaces. For example, when banks manage to realise and extract the efficiencies possible in say, cross-border payments, from new options like Ripple over Swift, then fintech disruption becomes real. These changes require that the industry change and that the momentum is slow and happens far more gradually than the hype would have you believe.
Banks have huge assets they can leverage in competition and collaboration with fintech players. They’re extremely good at processing vast volumes of transactions at scale in a very secure way.
More importantly, they currently hold a validated customer’s account, and enjoy the trust of their customers – trust which fintech start-ups can only dream of.
Inspiring industry-wide change, especially at a customer behaviour level, is a difficult challenge which is only remotely made possible by big players with massive influence and deep pockets.
We are at the beginning of a long journey to re-imagine the customer experience for a new digital generation.
In the short term, banks are not going anywhere. In the long term, how banks rethink their business models remains to be seen, but do not bank on an apocalypse.