Rise of Fintech - Convergence of Finance & Technology

Published by MBA Skool Team, Published on February 11, 2018

Technology has been progressing at a pace that puts Moore’s law to shame; the growth has been compounded by the increasing use of smartphones and the rise of emerging technologies such as Analytics, Big Data and Block-chain. The technology sector’s influence on the banking and financial services sector in recent times is uncontested.

Tech firms offering solutions in the financial space, popularly called Fintechs, have evolved from being a disruptive threat to a major opportunity for financial institutions. The rise in fintech M&A deals is testament to this. From the second quarter of 2015 to the second quarter of 2016, Goldman Sachs, Citigroup, and Santander Group, each completed atleast seven deals with VC backed fintech firms. Such M&A have mostly only been rewarded by the shareholders.

An analysis by AT Kearney shows that average returns from financial services companies buying technology companies far exceeded those from financial services firms acquiring other ‘like’ financial services peers. As in several other countries, there has an exponential rise in the number of Fintech startups in India as well over the last 3 years with total investment in the sector crossing over USD 1.3 billion. The depth and breadth of change being brought about by financial technology promises to redefine and reshape the sector as a whole.

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Rise of Fintechs

In the years since the crash of 2007-08, banks have concentrated on making finance secure and safe for all, making the right investments, and pruning their balance sheets to an optimal level. The focus has been on meeting government regulations and getting the perfect combinations of lending and borrowing. A wave of tech-startups, called the Fintechs, now offer an opportunity for the traditional banks to integrate the best of technologies to their traditional financial offering to provide personalized and customized offerings to customers. Financial products which were perceived to be commoditized can now be tailored to customer’s requirements. Banks have huge amounts of data such as those from their user’s transactions- what, when and how they make purchases, the kind of investments they make etc.- which can be parsed by technologies such Big Data and Analytics to reveal the users’ interest in a particular product or how likely they are to repay a loan they might take. At a time when data is king, banks can invest in these technologies in-house or partner with fintechs having similar strategic goals to offer differentiated product and thus gain an edge in the market.

The new possibilities

Insights from data is only one among the several benefits that will accrue to a bank on partnering with fintechs. With smartphones on the rise, banking tasks such as opening an account, service such as lending and borrowing, and regulatory requirements such as KYC can now be done conveniently through an app. Banks can reach out to customers through existing daily digital touchpoints and influence customers through customized offers, promotions and advertisements. Customer experience can be improved and queries addressed through the use of highly responsive chatbots. Customer needn’t visit banks anymore; banking can move online and banks can eliminate the routine and mundane jobs thus allowing them to cut costs. Peer to peer lending can offer consumers alternative to loans previously available only in traditional banks. Analytics, both predictive and prescriptive, can be used to lend to customers who are likely to repay or offer different interest rates to different customers based on their financial history as opposed to a single rate for all customers. Banks can broaden their customer base by offering niche asset management solutions to attract customers of all kinds. Possibilities are endless. A power shift from the traditional banks to the fintech is thus inevitable.

Business Models

With technology companies rising to prominence within the financial industry, various business models are possible. Banks have to make the conscious decision of whether to consider fintechs as competitors or partners. In one of the plausible business models, banks will retain the customer interface and continue as the main point of interaction with consumers. These banks can offer products/services in segment where they lack capability- e.g. personal finance - from third party providers such as Fintechs. Customers benefit from choice and product/price transparency. Banks can generate fee based revenues from Fintechs for using their interface and can monetize access to bank’s customer data. In yet another plausible model, banks can compete using the strength of its products to gain access to customers through Fintech platforms. In such a scenario, products will be exposed to high competition and the banks will have to pay to access third party platforms. Banks that offer niche products, can continue as they are to offer highly differentiated products. The need for a partnership with Fintechs will be less in such a case.

The future for this convergence

It is clear that banks will have to embrace disruption originating from technology companies. Governments too have realized the importance of this change in achieving many of its goals. Financial inclusion, a top priority for many governments including the indian government, is being facilitated by placing more thrust on a friendly ecosystem for banks and fintechs to thrive, so that they can serve the currently unbanked and bring them under the purview of the government. The NPCI(national payments council of India) launched its interoperable payments systems, UPI early last year to facilitate transactions without the need of personal credentials like account details, security pins etc. RBI deputy governor SS Mundra earlier this year said that in view of the competition from fintechs, banks should reorient their business model and look at collaborating with fintechs for improving efficiency. All of this point to the fact that government in India will play a huge role in enabling the convergence of technology with banking.

What’s not yet clear is how this convergence will play out. There are telling signs that Fintechs will be more of partners to banks than competitors. The number of Fintechs acquired by financial institutions dwarfs the number of IPOs. It makes a sound strategy for traditional banks to partner with Fintechs. The partnership will help solve many of the issues banks struggle with while turning potential competitors into collaborators. The impact on the bottom line and top line are also likely to be favorable. Innovation, a common buzzword in all firms, will only be furthered by this convergence. Armed with huge volumes of data from their customers and a new way to make sense of these data to provide superior customized solutions, banks can now exploit this convergence to forge a new path for themselves.

This article has been authored by Bharat Ramesh from XLRI,Jamshedpur


[1] https://www.salesforce.com/blog/2017/08/fintechs-revolution-evolution.html

[2] http://www.businessinsider.com/fintech-ecosystem-financial-technology-data-and-business-opportunities-2016-7?IR=T

[3] https://seekingalpha.com/article/4112678-big-banks-will-win-fintech-revolution

[4] http://www.rocketspace.com/corporate-innovation/financial-institutions-eager-to-buy-invest-in-fintech-startups

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