This article looks at the FinTechs' impact on the banking industry.
The article "Banking as a Service – The bank’s perspective" touched upon how established banks are reeling from an unrelenting onslaught on their core businesses by FinTech upstarts and tech firms. Let us now look at the battle form the other side – how technology innovators are disrupting an old, dodgy banking industry and making banking, well, fun!
What FinTech companies need from the banks
It is often said that in the digital age, data is money. The banking industry, however, has access to mountains of both data and money. This data is perhaps more precious than the shining bars of gold in Fort Knox or even those risk-free Government bonds.
It is not just the customer data and their product preferences which is relevant (this information is what is used by internet companies like Google to sell their services). What is more relevant is the Risk Management data. Banks, as we know, have two core functions – taking deposits and lending money on the one hand, and accurately pricing risk on the other. It is this pricing of risk which determines the competitiveness and profitability of a bank. Price something too high and you are beaten by your computers, price it too low and you make an economic loss. The success of this activity- the pricing of risk- depends upon the quantity and quality of data available. This data is what banks have and no one else does and it cannot be created in the short to medium term either.
This is just the tip of the iceberg though. Banks have a lot more going for them which makes them an important ally for any new tech focused player. They have a large customer base, their products are sticky (meaning it’s not easy or cost effective to change your bank), they have the best human capital and they have the financial resources to hire the best technology companies to create workable solutions.
Although examples abound of FinTech companies which have made huge inroads already, it might be difficult to replicate that level of success in the future without some welcome help from existing banks
Resistance is futile
For anyone who has been paying any attention to what is happening around them recently, they would have probably noticed that the digital revolution is picking up an even faster pace. Just consider what you can do with your mobile phone now, compared to even 10 years ago. The point is that the banking and financial services industry is also going to be altered significantly and permanently in the coming years.
The best option for established banks and upcoming FinTech startups and tech companies is to collaborate and leverage each other’s strengths in a both effective and efficient value proposition supplied on demand and over the Internet as Banking as a Service. It would be rather testing for banks to open up their data treasure troves to outsiders, and it would be a challenge for the tech companies to try and tip toe around the decades old labyrinthine structure still in place at some banks. However, in the end, everyone would be better off – the banks, the tech companies and most importantly, the consumer.
- Read more articles on FinTechs in VentureSkies' blog section.
- Read more on the services and packaged solutions which VentureSkies offers for FinTechs.
- PSD2 Directive - DIRECTIVE (EU) 2015/2366 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC (2015), The European Parliament and the Council of the European Union.
- DIRECTIVE 2007/64/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 13 November 2007 on payment services in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and repealing Directive 97/5/EC (2007), The European Parliament and the Council of the European Union.
Photo: "Money", Courtesy of Thomas's Pics, Flickr, (CC BY 2.0)