Fintech Transformation

What are the factors fueling the growth of the FinTech industry?

The growth and investments in the FinTech industry are spurred by many different factors: 

Consumer Behavior: Younger customers (Gen X and Millennials) are looking for faster and more efficient ways of conducting their financial transactions. Fintech companies are cognizant of changing customer expectations and serve their customers efficiently. 

Technological advancement: Legacy technology platforms that are the backbone of traditional banking and financial services players have become a roadblock to progress as they have not been able to keep up with changes in customer behaviors. FinTech companies have leveraged newer and fast emerging technologies such as Internet of Things (IoT), Artificial Intelligence (AI), Analytics, Blockchain and Cloud Computing to provide their services much faster and more efficiently. FinTech companies quickly recognize trends and make appropriate adjustments to their products and processes.

 Lower barriers to entry: The emergence of these newer technologies and the slower response from traditional banks and financial services players, have lowered the barriers to entry and opened avenues for FinTech companies to quickly enter the market and target customers with different expectations.

Where do we go next?

As FinTech companies gain momentum, there are significant factors that they will need to address to remain profitable and sustainable

Technology Giants: While traditional financial institutions continue to struggle with digital transformation and are unable to compete or collaborate with the Fintech players, there is an emerging trend of technology giants like Google, Amazon and Facebook starting to offer financial services products. These larger technology companies may acquire the smaller FinTech companies, as the smaller players offer products and services that can be complemented with those offered by the larger companies. Fintech companies are exposed to acquisition threats and must find ways of collaborating with other Fintech and financial services players to quickly expand the products and services they offer, in order to remain relevant in their markets.

Regulatory Changes: Fintech industry depends on collecting and analyzing vast amounts of data. This increases the risk of information being hacked, stolen, or used without authorization. Customers are looking for greater protection and privacy of their data. Fintech companies are constrained by regulatory compliance concerns with regulations like EU GDPR (General Data Protection Regulation), EU PSD2 (Payment Services Directive) and Bank Secrecy Act and GLBA 1999 Gramm-Leach-Baily Act (liability for customer financial data). Regulators push for tougher enforcement around data protection and privacy raises the compliance costs for FinTech companies.

Customer Retention: Customers have multiple options for similar products and services and switching costs are low. While customer attraction is key for startups, customer retention will require a bigger effort with the passage of time. Fintech companies have to identify customer retention strategies such as offering newer and complementary products and services and expanding partner ecosystem.

Bundling: Fintech companies tend to unbundle traditional financial services into individual streamlined offerings. Younger customers are ok with this, but older humans prefer the ease and convenience of a consolidated solution for products and services. Fintech companies will need to rollout new products, services and capabilities, and expand their offerings by integrating with non-finance partners. Payments, wallets and banking-like services are becoming an integral part of internet-led companies spanning across the health, retail, transport, media, property, and energy industries. By positioning products and solutions closer to the customer, Fintech companies will have great insight into consumer behavior, which can then be used to deliver a more personalized and seamless experience. The pressure to expand its portfolio of products and services efficiently will continue to be a challenge for every Fintech company.

Human Interaction: FinTech companies will have to find opportunities for human interaction in addition to technological innovations. As an example, Fintech companies may need to supplement their robo-advising and digital stock trading with expert human advice for stock portfolio management for more complex needs.

Mergers and Acquisitions: For the larger incumbents, technology and intellectual property will create a hot-bed for Fintech M&A. FinTech companies may look to expand their customer base by acquiring other FinTech companies or traditional financial service companies, including banks, that provide complementary products and services, play in different markets, or cater to a different customer demographic. Fintech companies that buy a bank may have to deal with legacy platforms, integration challenges and additional regulations. 

Summary

FinTech has caused a major disruption in the banking and financial services industry with the agility of newer technology platforms and processes to meet growing customer expectations. Fintech has a promising future, but faces uncertainties and challenges related to entrants of technology giants, changing regulatory requirements, bundling of products and services, and pressure to acquire and retain customers; they will need to constantly innovate to be sustainable and profitable in the future.