We have all heard about the fintech revolution. Financial technology has recently entered a new phase of its evolution. But how is it really happening?
We have all heard about the so-called fintech revolution. Financial technology or fintech has recently transformed from a disruptive threat to an enabling partner, entering a new phase of its evolution.
The professional services company Deloitte analyzed the development of the financial technology market in an effort to learn how banks, insurers, and investment management companies are tackling fintech transformation initiatives. Here is what they found:
Fintech is no longer the enemy
Speaking about the rise of fintechs, we have to admit that financial industry executives used to be focused on the potential threat that these non-traditional technology companies posed. Nimble and flexible, fintechs earned a notorious reputation – they were perceived as disruptive competitors that could overturn the existing business models.
However, attitudes have changed since then, according to Deloitte. Many financial institutions have started to collaborate with these emerging technology companies in an effort to access new markets and opportunities. At the same time, fintechs have sought to co-work with large financial institutions to expand into markets, get funding, and gain industry and regulatory knowledge.
We can now see numerous examples of financial institutions and fintechs working together to benefit from each other. TD Bank Group, among other banking organizations, has decided to set aside $3.5 million from its fintech investment pool to provide financial and other support for start-up patent applications.
While studying the industry and the way companies cooperate, Deloitte drew some interesting conclusions that are listed below:
- New company formations are in decline over the past two years.
- Funding in many categories is still on the rise, especially in certain banking and commercial real estate categories.
- New funding sources are emerging, suggesting that we are entering a phase of consolidation and maturation.
- Fintech acquisitions and initial public offerings (IPOs) are also ramping up.
- There continues to be meaningful regional variability in fintech creation and investor interest.
Fintech investments are rising
The investment money flow remains robust, as Deloitte pointed out. In turn, this indicates start-up viability, if not maturity. Analyzing the data by sector and solution has shed light on some interesting dynamics:
- New fintech company formations in some areas are experiencing a downturn over the past two years
- The amount of money being raised in three of the four industry sectors remains robust right through the current year
But which are these industry sectors? Investment management, real estate, as well as banking and capital markets are showing some good financial results. The exception is insurance, where the investments decreased in 2015. The year after they plummeted back, but experienced another decline this year.
“So while the pace of new fintech formations may have slowed down, the investment money flow remains robust.“, as Deloitte concluded.
Incumbents are moving from defense to offense
It seems that fintech has entered a stage of shakeout and consolidation, as it often happens with emerging industries, Deloitte commented. Firstly, fintechs need to face their own challenges that come with the changing environment. Fintech founders should focus on the following questions, as posed by Deloitte`s researchers:
- How will they be engaged and valued?
- How will they need to be governed and comply with regulations?
- How will they be regarded in terms of leadership, reputation, culture, and values?
On the other hand, the incumbents are faced with another important challenge. As Deloitte asked, “how can they move forward to operationalize their engagement with a changing fintech ecosystem?” Some of the problems (challenges) that should be considered by the incumbents are listed by Deloitte:
1. Change the mindset, from defense to engagement. Do you still regard fintechs as a competitive threat? How much do you actually understand the landscape of fintech providers that exists today? Do you perceive a difference between those firms that look to compete, versus teaming with incumbent firms?
2. Examine your firm strategy for working with fintechs today. Has there been a priority on investment or acquisition? What is your current collaboration strategy and engagement model? Do you manage these interactions in a coordinated fashion, or are various parts of the firm engaging in different ways based on their objectives?
3. Begin taking steps to operationalize how you engage with fintechs. Do you struggle with how you evaluate and source the fintechs that address your strategic and operational goals? What is your ability to match the fintechs’ pace of development, from contracting to development of proofs of concepts and pilots, to demonstrating results? How do you measure success?
It is interesting to observe how the fintech companies are disrupting the banking industry. But the opposite is also an exciting trend – the banking industry is disrupting fintechs, as Eric Piscini, a principal in Deloitte Consulting’s fintech practice, claimed in the report.
“It’s a good example of the disruptors being disrupted.”, as he stated.
The full research is available here.