FinTech companies use advanced technological solutions and data analytics to create new efficiencies and reduced costs in financial services. Leaders of the incumbents, banks around the world, are acutely aware of the wave of disruption headed their way.
We asked, how are leaders responding to the threat, and what can leaders from other industries learn from their responses?
10 things to know about FinTech to understand the nature and scale of the change:
- US$27 billion of banking revenue under threat from digital disruption (KPMG).
- Global investment in FinTech in 2014 was US$12.21 billion and it is multiplying rapidly. (The Economist)
- FinTech is the No.1 target for Venture Capital funding globally.
- FinTech companies now comprise 2% of the financial market. That’s just the start.
- Australia is behind. The local FinTech scene is five to seven years behind the UK. (Lend2Fund co-founder Paul Missio)
- FinTech disruption will be global: bits don’t respect borders.
- Regulation is bounded by national borders and 62% of bankers believe regulation restricts FinTech (The Economist)
- WeChat, Tencent’s social media platform, has launched WeBank to its 650 million mobile, digitally enabled and active customer base.
- FinTech companies won’t take on banks, they will take a piece out of each product or service line, gradually eroding profitability.
- The top five FinTech sectors are lending, payments, personal finance, and money transfers.
By and large, the finance industry is adopting one of three responses: ignore, partner, invest. While Australia is considered to be lagging behind leading FinTech centres like London and New York, the past 12 months has seen an explosion of investment and partnering as bankers seek to get its foot in the door.
It’s not as simple as buying in brilliant new ideas and the technology to make them happen. To own FinTech, or at least to be part of the FinTech revolution, banks have to learn a whole new way of operating: collaboration, partnerships, open innovation. It’s a challenge that they acknowledge: “Banking is about identifying and mitigating risk… innovation is about taking risk (…) it’s challenging to support both cultures the same place,” says Shayne Elliott, the CEO of ANZ.
Banking is about identifying and mitigating risk… innovation is about taking risk. It’s challenging to support both cultures in the same place.
Both FinTech startups and threatened incumbents know that ultimately their interests converge. One has agility, technology and the appetite for risk the other has assets that are hard to replicate: customers and cash. Having access to both is a key success factor for either.
Major financial institutions are actively fostering startups even as they threaten their business models, as they accept both the inevitability of such threats as well as the cultural block on such innovation being nurtured internally.
They are meeting the challenge by collaborating with each other and across industries. They are bringing in advisors, sponsoring innovation and buying up technology. In New South Wales the state government has teamed up with more than 20 large financial institutions, including Westpac and American Express, with the vision of turning Sydney into a global FinTech hub to rival New York and London.
New kinds of partnerships
ANZ has set up an international panel of experts to advise the board on technology, customer behaviour and innovation. They will meet quarterly, and include experts from Twitter, PayPal, Procter & Gamble and Dimension Data.
Stone and Chalk is an independent FinTech start up hub in Sydney CBD set up with financial support from AMP, ANZ, KPMG,Macquarie Group as well as ASX, IBM, and Optus.
Embracing and sponsoring the startups
Barclays have launched a global community of FinTech innovators: ‘Rise’ is designed to help shape the future of finance and drive growth, to connect the world’s most active innovators across the world to each other, to corporates, and to resources and support networks.
Investing in new business models that threaten existing ones
First State Super has announced it will invest $250 million into tech companies in next few years in partnership with H2 Ventures – a specialist FinTech venture capital fund with plans to invest in100 FinTech start ups over the next 3 years. They run the H2 Accelerator at the incubator Stone and Chalk in Sydney’s CBD.
AMP has created a FinTech managed fund: AMP New Venture and taken equity stakes in two FinTechs, Macrovue and MoneyBrilliant.
Commonwealth Bank of Australia has opened innovation labs in Sydney and Hong Kong and with a similar facility in London to open in July 2016. It also deal struck in November 2015 with the Chief Scientist of Israel to collaborate on technology.
Westpac has taken equity stakes in several FinTech startups, including peer-to-peer lender SocietyOne and payments platform PromisePay.
NAB established NAB Ventures in 2015 a $50 million dollar fund to invest in partnerships, startups and alliances in Australia and globally.
The financial services industry is not the first to be hit by massive, largely unanticipated disruption. Perhaps it stands to lose more, but incumbents have the advantage of being able to see the change coming and to learn from those businesses and industries who have lost out to new players.
How successful individual financial institutions will be over time will depend on a range of factors, not all of which will be within their control. Survival depends on the ability to acknowledge the threat and the cultural impediments to home grown innovation, to nurture the opportunities without stifling their growth. It is a challenge that will hold lessons for all.
