The introduction of Open Banking, starting in 2015, opened the door to innovative fintech companies to disrupt and amplify what is now an increasingly dynamic financial services market.
With the incumbent banks still slow to change, and in any case restricted by regulation, there would seem to be almost limitless opportunities for startups to use APIs (application programming interface) to provide new services to consumers and reduce friction in transactions across the system. Sophisticated use of data and AI (artificial intelligence) has the potential to intensify competition and innovation, improving the customer experience and enhancing financial inclusion.
However, the financial services landscape is nowhere near the free-for-all that other tech sectors have historically enjoyed. Regulators have been scarred by successive crises and are hyper-alert to the risks of fast-moving and opaque technology-enabled transactions. But at the same time, they want to encourage growth and take advantage of new tools and companies and the benefits they can offer to a variety of stakeholders.
So what does this mean for entrepreneurs interested in entering this space? We kicked off this year’s MBA Entrepreneurship Project with a discussion led by a panel of our expert tutors.
While banks used to respond to challengers and disrupters by acquiring them, now they prefer to keep their options open by collaborating with a number of different fintechs.
Unsurprisingly, their overall prognosis for the sector was positive. While banks used to respond to challengers and disrupters by acquiring them, now they prefer to keep their options open by collaborating with a number of different fintechs, which allows the fintechs themselves to scale up rapidly and become major businesses. In fact, our panellists suggested that the financial services landscape was becoming more like the pharmaceutical sector, where most of the innovation comes from small biotech companies and universities rather than from in-house Research and Development departments in the large companies.
Innovation is still badly needed, even if just at the level of the customer experience, which traditional banks do not seem able to get right. Young people in particular are used to technology and expect payments and transfers to happen instantaneously, rather than in three days, which is common in traditional banks.
Nevertheless, much as banks and regulators might like the idea of collaboration between large traditional banks and agile and creative fintech startups, challenges remain. There are differences in scale. The millions of customers that banks bring to the party are accompanied by red tape, certification, and identity checks that smaller fintechs lack the resources to deal with. And banks in turn are hampered by legacy systems and cultures that make it difficult and expensive to partner directly with smaller companies – however much value the banks can see in those services.
As a consequence, the way forward for the banking and fintech sector is likely to be through an increasing number of platforms facilitating connections between different technologies and providing and aggregating data.
These can improve the customer experience, including by introducing them to new products, or bringing together existing products in a seamless way. They allow for continual innovation without forcing banks to take the initiative or manage new programmes themselves. And they make it easier for new fintechs to offer niche, specialist products, such as around risk assessments and risk evaluations, to a range of banking customers.
Nazan Cayrak, Global Strategic Account Director for Finastra, one such platform, said that it was popular with banks and investors because they do not have the bandwidth to explore all possible innovations. They want to deal with fintechs, but ‘those are too small, tiny, and the risk associated with them is huge’. The big investment is in the time and risk in process testing: ‘So that's why the banks want to be part of community, why a platform. There will be other parties in that platform and then they can help to build a healthy ecosystem so that they and fintechs can grow the demand together.’
Banks and other financial services companies could also throw into the mix their own customer-facing platforms, as panellist Likhit Wagle, Managing Partner of IBM Consulting, suggested: ‘When you are seeking to buy a house, the mortgage is not the only thing you learn about, the life insurance is not the only thing you are bothered about: you are actually thinking about the schools, the community in that area.’ He argued that banks could bring together all the providers that new house buyers would need on a single platform which they could orchestrate.
The future for fintech looks platform-shaped and bright, but our panellists did also include some caveats, particularly in the area of regulation. While fintechs themselves may escape some of the rules and processes that apply to banks, the fact is that they are providing services to, and therefore operating within, a highly regulated environment. Technologies such as quantum and AI are going to become more and more relevant, which will bring fintechs up against ever-tightening regulation in the area of data.
Tech companies have historically run ahead of legislation, leaving policymakers desperately trying to catch up. But this is one area in which collaboration within the ecosystem and with regulators is key. Tarek Mouganie, the founder of Affinity, a digital bank in Ghana, offered his advice on how to approach regulators. ‘One thing that you need to understand with regulators is that they will always move for the consumer and against the financial institution. When it came to us, what was very important was to try to show that our values are aligned with the regulator … we really want to solve the same problem.’ Lobbying is not just trying to get the regulator to say ‘yes’, but to understand their point of view and make compromises where necessary. ‘When you do something like that you end up building trust with the regulator. And we're beginning to see that they're coming to us to ask for advice in terms of how they can solve some specific problems, because we're the only people in the ecosystem that are working alongside them in this way.’
