As we look ahead to 2017, one thing is clear: words like “disruption” and “fintech” will continue to shape our industry.
Disruption is a radical form of change that occurs not just when a new technology arrives on the scene, but when visionaries see potential in it to reinvent or reshape an existing business. In financial services, disruption is coming in the form of financial technology, or fintech. Digital currencies such as bitcoin, once a fringe approach to transferring money, are going mainstream now that financial services institutions have started to see their potential. A number of banks are building systems using blockchain, the technology underpinning bitcoin. I expect interesting developments on this front in 2017.
Fintech start-ups are also paving new ground in mobile payments, peer-to-peer lending, and crowdfunding, in which individuals can fund star-tups and potentially reap rewards. Banks will try to develop strategies to counter the trend, and I expect they’ll increasingly look to Amazon, Uber, Apple, and other Silicon Valley giants to develop business plans they can use to adapt to the fintech trend.
Platforms and the network effect: Small firms will continue to be big disrupters
Whether established financial institutions succeed will depend on how well they can adapt to, and to some extent adopt the platform mindset used by fintechs.
The common denominator across new fintech startups are cloud-based platforms, which play a critical role delivering the necessary speed and scale today’s fintechs need to drive their businesses. Powered by this technology, some platform companies grow incredibly large but still require very little infrastructure; Facebook has a market cap of about $356 billion and 14,000 employees. General Motors has a much smaller market cap, about $50 billion, yet has about 215,000 employees. Quite a difference.
Large banks more closely resemble GM, but that’s changing and will continue to do so in 2017. They have numerous business lines, each supported by legacy strategies and technologies and often operate as silos. Top executives face a challenge when seeking to understand everything that’s happening across the enterprise, and how different business lines affect each other. Banks are moving away from this mindset, prompted in part by compliance requirements, but also because they have to if they hope to provide the digital solutions their customers want.
In contrast, platform-based fintech startups are nimble because they focus on one thing, and they do it well (or they don’t, and quickly fold). They can quickly establish their brand and gain market share, but they don’t have the financial power or overall expertise large banks do, and that’s a disadvantage. They also face a growing number of competitors, so those without strong business plans and ample funding may fail.
Both sides have strengths and liabilities. Looking ahead, I expect to see an increase in partnerships between traditional banks and fintech start-ups, such as JPMorgan’s mortgage venture with OnDeck. Banks will also look for ways to turn their size and brand awareness into assets.
Leveraging legacy businesses while thinking like a start-up
Fintech isn’t going away. Banks need to replicate these businesses or partner with them. That doesn’t mean abandoning their traditional businesses and customers. Microsoft’s legacy businesses still thrive, but under chief executive Satya Nadella, the company has moved into cloud computing and other platform-based offerings, even at the risk of cannibalizing older product lines. In 2017 and beyond, we’ll see banks thinking more like tech companies, though the regulatory framework in which they operate will keep them from being as nimble when it comes to change.
This change is already happening. Today Deutsche Bank, UBS, Santander, and Bank of New York Mellon are working on a digital currency to manage trades through blockchain. Several large U.S. banks launched a person-to-person payment service called Zelle, which will compete with products such as PayPal’s Venmo.
In 2017, fintech innovation will continue to challenge banks’ business models, attract younger consumers who are deeply connected to mobile and social platforms, and transform an industry that consists of Goliaths with Davids coming at them from all sides. Banks and fintechs may need to join forces to serve customers looking for the best of what each side can offer.
Debra Walton, Chief Content Officer, Financial & Risk, Thomson Reuters