“Partnering with and/or sourcing capability from fintech start-ups and technology companies will form an important part of the response for established financial institutions, as they more aggressively pursue revenue growth, cost efficiency and risk mitigation opportunities…”
“We have to have the mindset of a fintech company”; “We need to think and act like a 200-year-old start-up”; “If we don’t innovate, we’re toast”. These statements from Australian bank CEOs highlight three strategic implications for the future of the banking industry.
Fintech is one of the fastest growing sectors in the global financial services industry, with total investment rising from US$100 million in 2008 to over US$24 billion in 2016. In Australia, we have seen the number of fintech start-ups increase from below 100 in 2014 to over 600 today, with more than US$650m invested in the fintech sector today (from US$50m in 2012). While this growth has seen the emergence of fintechs that are seeking to directly compete with incumbent banks (the “carnivores”), with US$30bn of industry revenue estimated to be at risk of disruption over the next five years, there is an increasing number of fintechs looking to partner with or sell their services to financial institutions (the “herbivores”).
There are several factors that are reshaping the banking industry and fuelling the growth of fintech – the accelerating pace of change, the proliferation of mobile devices and digital platforms, falling barriers to entry and greater competition, and a more supportive policy and regulatory environment for fintech innovators – each playing an important role. However, above all, changing consumer behaviours and attitudes, led by the rising tide of millennials, and a move towards platform-based business models, will be the most fundamental driver of the industry’s evolution in the future.
Technology disruption is quickly evolving the competitive landscape, lowering entry barriers for new players and creating new business models. Investment in digital innovation will be critical in delivering customer experiences that are being redefined by the likes of Uber and Airbnb. And partnering with and/or sourcing capability from fintech start-ups and technology companies will form an important part of the response for established financial institutions, as they more aggressively pursue revenue growth, cost efficiency and risk mitigation opportunities.
There are benefits for both banks and startup innovators in a collaborative model. Fintechs gain access to a range of important growth levers: customers, distribution, data, capital, experience, licences, a trusted brand and an ability to scale much more quickly. Alternatively, incumbents gain access to new ideas, solutions, capability, knowledge and potential investment opportunities in new players that are typically focused on a specific problem or opportunity and have significantly lower cost structures. It ultimately allows incumbents to be more agile and faster to market, as well as providing strategic optionality.
In an industry traditionally dominated by large players, with historically product centric operating models such as banking, the emergence of platform-based businesses in and outside of the sector will likely result in a shift in the balance of power towards platform providers themselves and the end customer. Furthermore, as technology infiltrates every aspect of life, retail banks could become largely invisible to consumers, as banking activities become hidden for example by virtual assistants, like Amazon’s Alexa, who fulfil daily personal and financial obligations, informed by data gathered from a fully connected way of life. The technologies that enable this scenario are all available today – advanced data analytics, voice authentication, artificial intelligence (AI), connected devices, application programming interface (API) and cloud technology.
In considering their responses, banks remain highly trusted and could develop ‘lifestyle layers’ to compete in the platform space, orchestrating eco-systems of fintechs and other providers themselves for consumers and small businesses. If banks are not leveraging these capabilities they face being disintermediated by, and disaggregated behind devices, services and ‘lifestyle platforms’ that manage more than financial services.
There is no doubt that the banking industry of the future will look very different from what it does today. The landscape will be more competitive, more efficient and provide more customer choice. Banks will come under increasing competitive pressure unless they can leverage technology to cut costs, closer to leaner fintech operators. Agile incumbents that are efficient distributors or acquirers of leading fintech capability to meet adjacent customer needs have the potential to generate new sources of growth and value for customers.