The question is no longer whether fintech will transform financial services, but which firms will apply it best and emerge as leaders.
Not too long ago, there were a plethora of fintech companies, developing and upending the financial services sector with data-driven, real-time solutions, and there were the traditional financial companies and banks, still mired in older processes and ways of thinking. Now, there’s little daylight between these two worlds — as banks become tech companies, and tech companies become banks.
That’s the word from a recent report from PwC, which notes that “the lines between financial services and tech firms have blurred to the point that the roads are a free-for-all and previously distinct sectors are colliding. Many tech companies are applying for financial services licenses, and financial services organizations have begun calling themselves technology companies.”
However, it’s still an open question of whether financial services companies can advance as quickly as other industries in this new economy. To date, the financial services industry has struggled with achieving the network effect that has opened up new possibilities across other industries. “How can these be achieved in banking? In our mind, this is probably asking the wrong question,” according to Ben Robinson, co-founder of Aperture, in a recent Medium post. “Banking is inherently a transaction-based activity. This makes it unsuitable to most types of network effects. For example, most companies that have tried to build social network effects into banking, either as part or whole, have failed. We don’t want to chat with our friends specifically about money, we don’t want to share all of the information on our assets and liabilities.”
Although “the new banks sprouting up might be cheaper and more convenient than what came before, they aren’t able to arrive at meaningfully and sustainably lower costs of customer acquisition numbers once they’ve gone beyond the early adopter audience,” Robinson believes.
Still, new technology adoption continues across much of the financial services landscape. PwC’s survey of 500 financial and technology executives finds that 47% of tech firms and 48% of financial services organizations have embedded fintech fully into their strategic operating model. Also, 44% of tech and 37% of financial services organizations have incorporated emerging technologies into the products and services they sell.
The financial services and tech industries both seek to not only sharpen their technology-based offerings to customers but also carve out new commercial possibilities, the PwC report states. “Digital-only banks are offering redesigned client propositions and cost profiles. Investment managers are deploying fully customized robo-advice,” the report’s authors point out. “Insurers are using sensors to monitor people’s health and help prevent illness.”
While the two sectors are converging, financial services and technology executives have different ideas about what technologies will have the most impact. More than half of financial leaders believe artificial intelligence — delivered through services such as robo-advice — will create the biggest change in how financial services are delivered over the next two years.
Tech executives, on the other hand, say the Internet of Things will be the game changer — for example, employing sensors in pay-as-you-drive insurance.
Financial services consumers “are ready for the digital shake-up,” the report’s authors add. “The question is no longer whether fintech will transform financial services, but which firms will apply it best and emerge as leaders. We think the winning companies will be those that not only embrace fintech-driven business models but figure out how to navigate wider and more crowded lanes with approaches that make the most of financial services and tech’s combined strengths.”
Ultimately, the delivery vehicle that will work within financial services is “embedded finance,” Robinson believes. “Because payments are the most frequent of the transactions we make — as well as an extremely rich data source — it makes sense that payments have been the beachhead for most non-banks from Uber to Apple to start their push into banking. “But it won’t stop there. As Amazon is showing, the goal isn’t picking off a few high-value revenue lines, but making value flow ever more easily within the Amazon ecosystem, removing friction and making it easier for buyers and sellers to trade. Similarly, the Alibaba and WeChat models both serve a higher purpose: to embed financial services into people’s lifestyles.”