Banks, the incumbents in the financial services sector, have long enjoyed high barriers to entry, further buttressing their positions in the financials service market and protecting their profit margins and market share. However, with the start of the digital boom, a thriving tech industry has given rise to a number of start-ups which intend to upend the financial market. These so-called FinTech companies, which leverage proprietary technology, and more consumer-focused service, have come to mount a credible challenge on the conventional players in the financial markets. Realizing the disruption, traditional market-players (i.e. banks) have become more receptive to adaptation and innovation. As promising as these FinTech start-ups are, whether they have the requisite leverage to influence and disrupt the banking incumbents is far from clear. This coursework intends to analyze the biggest FinTech companies in their respective markets, and the threats they pose to the banks. The coursework also focuses on the areas where these threats are present in the banking industry, how banks can reinvent themselves to ensure that they do not lose market share to FinTech start-ups.
Major player in FinTech and the current landscape in the industry
The last decade experienced an unprecedented increase in the number of financial technology companies looking to upend the financial services market. There are around 12000 FinTech companies globally (Dietz et al. 2016). There tends to be uncertainty as to the exact definition of what FinTech is. However, FinTech can described as innovative methods of offering financial services, thereby competing with the incumbents in the financial services market (Lin, 2016). EY (2017) describes FinTech companies as organizations, which incorporate innovative technology and business models, thereby, providing, enhancing and disrupting financial services market.
As with many other sectors, investment drives innovation in the FinTech landscape.
In 2012, the accumulated amount of funds invested in these companies reached $12.2 billion (Accenture, 2015), testifying to the potential these up-and-coming financial tech companies. By 2016, the amount of money invested in FinTech companies totaled $17. 6 billion (Browne, 2017).
The landscape in FinTech could not be more opportune for success. The adoption of FinTech services has been swift. EY FinTech Adoption Index puts the percentage of customers availing themselves of FinTech at 16%, while around 90 % of people surveyed by EY told that they were aware of FinTech services (2017). Around a third of people in 20 markets across the world have started to use FinTech services, indicating the wide traction these services have gained over the last decade. These advancements in FinTech have the potential to upend the financial service market, with PWC asserting 20% of traditional financial institions are at risk because of the disruptions in the FinTech sector.
Corresponding to the increased adoption and investment, the number of players in the FinTech is proliferating. Stripe, a FinTech company founded by Patrick and John Collison, utilizes a proprietary API to enable merchants worldwide to accept mobile and online payments, directly competing with Paypal, the stalwart in online payments. Valued at $9 billion, Stripe intends to transform the way merchants handle online transactions. Recently, the company added Apple Pay and Alipay integration, further compounding the disruption it has caused in the mobile and online payments industry (Quittner, 2017). Payoneer is one such as FinTech company enables cross-border-payments between professionals and companies (CB Insights, 2017). Services such as Upwork, Airbnb, Amazon, Getty Images, and Google avail themselves of the mass pay out services, effectively bypassing the incumbents while transferring money to their beneficiaries.
Currency-exchange is considered a lucrative financial service, with a daily volume of around $4.8 trillion transactions. Inefficiency involved in currency-exchange has made the sector more susceptible for disruption: TransferWise. TransferWise utilizes a P2P technology to enable customers transfer funds with less costs involved. With TransferWise handling around $1 billion in transactions a month, it is poised to gain market share from Western Union– the incumbent in currency exchange transactions (Feldman, 2015). The traction TransferWise is a testament to how adaptive customers have become while choosing financial service provider. Another FinTech player, is undoubtedly, SoFI, a loan provider for students. SoFi positioned itself as a viable challenge to banks, by offering loans amounting to around $3.5 billion in the first quarter of 2017 (Verhage and Wang, 2017).
Lending Club is a FinTech disrupting the loan industry, by enabling the peer-to-peer lending. Loan issues have long been the exclusive domain of traditional financial institutions P2P lending platforms, including Lending Club issued loans amounting to $5.5 billion in USA in 2014 (PwC, 2015). By 2025, P2P lending market is expected to grow to $150 billion (Federal Reserve of Cleveland, 2014). FinTechs such as Lending Club are poised to capitalize on the growing industry, sending shockwaves within the financial sector. Square, San-Francisco based disruptor, has established itself as the alternative service-provider in the payments industry. Square enables customers accept credit or debit card payments, enhancing the business accept funds (Markovich et al. 2014). Looked at face value, these FinTech companies seem to coalesce into a potent force to disrupt the financial services market.
The most potent threat presented by the FinTech
The FinTech players analyzed above, and other burgeoning FinTech starts up present a multidimensional threat to the incumbents in the financial services market. Biggest such threat is disintermediation, which is reducing the intermediaries involved in financial services transactions. The disintermediation is being highlighted in the cases of Transferwise (sending funds without banks involved) or, SoFi (refinancing student loans without banks). When FinTech companies have the capacity to render their services by cutting banks and other traditional financial institutions off the value chain, this type of disintermediation has the upend the whole financial service market (Emmerson, 2015).
How banks are repositioning themselves to be the net-winners in disruption
Notwithstanding the fact that up-and-coming FinTech companies have started to attract traction and sizable investment, therefore, market share in the financial services market, the banks, have started to adopt viable strategies to keep up with the new revolutions being engendered by the FinTech companies. These strategies adopted by traditional financial institutions (i.e. banks) will be analyzed below.
To proactively respond to the credible challenge posed by the FinTech disruptors, banks and incumbents are increasingly relying on a number of strategies, which range from investing in FinTech companies and founding them, to integrating with or developing experiments with Fintech companies. These strategies can effectively ensure that they retain market share among customers, who increasingly value more efficient and cheaper service. The banks have become more receptive to change to ensure that they benefit from the innovation of the smaller FinTech companies
To achieve that objective, some traditional financial institutions are have chosen to integrate with (i.e. partner with) the FinTech companies. Roughly three quarters of traditional banking institutuons consider partnerships with FinTech companies essential in the 21st century, testifying to how open they have become to integration in the face of disruptions (MagnaCarta Communications, 2017). Accenture also found how collaboration was conducive for incumbents to sustainably thrive. There are number of cases illustrating how traditional financial institions have started to open up and collaborate. JP Morgan, a traditional financial institution, for example, partnered up with Ondeck, a FinTech company, to formulate, fund, and distribute loans to small businesses with a lase-like focus (Son, 2015). While a British traditional financial institution, Santander UK, is working with the so-called Kabbage FinTech to disseminate loans to small businesses, decreasing the time spent distributing the loans to beneficiaries (Dunkley, 2016).
Raphaels Bank, British private bank has partnered with Transferwise for it to access consumer data, in return, the bank enabled the FinTech access to the Faster Payments Service (Arnold, 2017). Collaboration between incumbents and FinTech has also become more pronounced in EU. Poland’s Commerzbank has started to partner with Organe Polska, a FinTech start-up to enhance its mobile banking experience for its customers (Reuters, 2017).
Some traditional financial institutions are setting up their own Fintech arms to better respond to the present threats presented by the FinTech sector. Wells Fargo has invested its own FastFlex, which enables the financial industry giant to deliver funds to small business in a day (Wells Fargo, 2016). Recently, HSBC, a London-based incumbent bank, launched their HSBC Beta app. The new enables customers to manage money matters 24/7, whether online or on mobile. To ensure that the app is competitive enough, HSBC will also allow its customer to add accounts from other service providers such as Barclays and Bank of America (Browne, 2017). These strategies being pursued by the incumbents give testament to have proactive they have become in their response to FinTech.
The financial viability of these FinTechs to upend the financial service market
However, it is not clear that whether the investment amount justifies the argument that these FinTech companies can viably challenge traditional financial institutions. P2P lending has gained wide traction, as analyzed above. However, the argument that P2P platforms such as LendingClub provide loans to their beneficiaries by successfully bypassing the banks seems predicated on an unwarranted premise. In 2015, more than four fifth of the funds P2P platforms provided came from traditional financial institutional, as opposed to individual investors (Cortese, 2014). Web Bank, a traditional financial institions, is the main credit provider for the LendinClub, further substantiating the argument that FinTech companies cannot operate in isolation.
McKensiy posits that for FinTech companies to thrive in the long-term, they have to be receptive to the idea of ‘co-opetition’, whereby capitalizing on the existing infrastructure the traditional financial institutions have (2014). Paypal, another FinTech is also tied to another traditional financial institution – Wells Fargo. The Economist (2017) contends that FinTech does not have the financial muscle to upend the banking industry, citing how you need a bank account to access the FinTech services.
Customers of traditional financial institutions have been resistant to switching over to the FinTech companies, diluting their financial viability to upend the financial service market (World Economic Forum, 2017). However, as asserted by the head of a large French bank, there are myriad factors including capital and regulatory that vitiate the impact Fintech can exert on the financials services.
Kreitzman (2017), while acknowledging how disruptive FinTech can be, asserts that the threats can be adapted to opportunities for the incumbent which are willing to adapt quickly and capitalize on the innovation. Popper (2017), contends that instead of upending the banks, FinTechs are actually working with them, signaling how FinTech merely enhances the provision, and consumption of financial services rather than disrupt the incumbent.
The key areas where banks are facing disruptions
The impact of FinTech are pronounced encompass diverse areas of financial services including consumer banking, fund transfers and payments, wealth management, insurance and others (PwC, 2017). However, where the Fintech are causing the most disruption is consumer banking and funds transfers and payment. By 2020, PWC estimates these two areas will be the most disrupted by the FinTechs. In China, payments and remittances, along with insurance are the areas most likely to be disrupted by Fintech (EY, 2017). In 2017, cross-border payments handled by FinTech have surpassed the amounts handled by the banks, supporting the argument that payment and funds were the two areas most disrupted by the Fintech (Groenfedlt, 2017). Roughly half of the FinTech surveyed are focused on payments and funds transfers, highlighting the unprecedented disruption in the area (MagnaCarta Communcaitons, 2017).
Asset management and insurance are also being disrupted by the agile FinTech companies around the world (PwC, 2017). Investment in the so-called insurance tech companies has swelled to an accumulated $3.4 billion since 2010, giving credence to the level of disruption expected in the insurance market. The three fourth of the insurance companies surveyed by the PWC concurred that their industry (i.e. insurance) was the most susceptible to FinTech disruptions (2017).
Overall, it is clear that innovative FinTech has the potential to change the way financial services are envisioned, rendered, and consumed. However, as much as they upended the way financial services are offered, and in return, consumed, they tend to fall short of positioning themselves as dominant players. As analyzed above, incumbents (i.e. banks) wield financial clout and muscle that enable them to outperform the FinTechs in the long-term. The strategies pursued by the incumbents also signify how these incumbents can translate FinTech threats into opportunities. The capacity of FinTech to upend the financial services market, as discussed, remains not viable, and the major players are investing heavily into areas to ensure that they keep up with the challenges.