Financial Technology’s (FinTech) impact on the banking industry has taken many by surprise, with consumers being the key beneficiaries. The digital transformation of financial services has raised customer expectations to an extent that conventional banks have had no choice but to respond with fresh, customer-orientated products and services.
While FinTech start-ups are capturing large swathes of the financial services markets, traditional banks, with access to large balance sheets and cheaper funding, will almost certainly continue to play a significant role for the foreseeable future.
The rise of Big Tech financial services is now threatening to become an even more critical disrupter. In this article, we will look at:
- The Rise of FinTech
- Digital Disruption Drivers
- The Rise of Big Tech Banking
- FinTech Talent Trends
The Rise of FinTech
The financial crises of 2007 to 2009 hurt banks severely. Their reputation took a nosedive, and they have subsequently faced increased regulation, a low interest rate environment, and significant deleveraging. There has also been a drift of major banking from Europe and the United States to higher growth economies in Asia and severe competition from the rapidly developing FinTech sector, challenging the profitability of the conventional banking services.
FinTech simply means applying innovative digital information and automation technologies, machine learning, artificial intelligence, and big data to financial services. As of February 2021, there were 10,605 FinTech start-ups in America, 9,311 in Europe, the Middle East, and Africa, and 6,129 in the Asia Pacific region.
In terms of market share, while the global financial sector is worth $26.5 trillion, the FinTech share at present is at just around 1% of that globally (3% in China). However, given the fast pace at which FinTech firms are growing their services FinTech is expected to reach a market value of circa $436 billion by 2026.
FinTech businesses provide high-quality digital and mobile banking with excellent customer experience while offering lower costs and higher investment returns compared with banks.
Apart from losing market share, suddenly, banks have found themselves with over-extended physical networks of branches and obsolete technologies such as mainframe computers. Alongside this, customer expectations have changed substantially; today, customers demand new user-friendly, efficient and customer-orientated services that put them in control. To survive, banks have had little choice but to restructure their operations. Of particular benefit to their customers has been the development of digital banking services and the conversion of clunky websites to smart new mobile apps providing consumers with much greater control of their bank accounts and credit cards.
While FinTech has a considerable impact on consumer banking, it is yet to make big inroads into corporate banking, specifically lending to larger companies. For instance, in 2019, global fintech credit was estimated to be $223 billion against the total credit of $795 billion.
Digital Disruption Drivers
The primary advantage of FinTech is that their business models are leaner, leverage state-of-the-art technologies, and are unencumbered by rigid legacy systems. These benefits allow them to respond flexibly to changing customer needs.
The main drivers of this disruption are changes in customer expectations on the demand side and technology development on the supply side. For instance
- Efficient and effective customer credit screening using data analysis and big data
- Targeted risk-based pricing models
- Reduced need for staff and physical premises
- Increased levels of financial inclusion for businesses and individuals without credit histories and in developing countries
- Absence of legacy real-estate networks and infrastructure
New technology has led to lower-cost services, including lending, payment, financial advice, insurance, and new and improved products.
Big Tech Banking
Big Tech banking refers to banking services provided by a large business whose primary business is digital services. These companies include Apple, Google, Facebook, Amazon and Alibaba. They are potentially a more significant threat to banking than FinTech. For example:
- Google is planning to launch bank accounts in partnership with Citigroup
- Apple has launched a credit card in partnership with Goldman Sachs
- Facebook plans to launch a digital currency
- Amazon provides business lending services
According to the World Economic Forum (WEF), empowered by their resources in cloud computing, big data, and artificial intelligence, Big Tech are ideally positioned to make a massive impact on banking in the future.
The WEF also notes that while FinTech start-ups have successfully changed the basis for competition, their impact has been less disruptive than expected. Currently, Big Tech is working in partnership with banks; however, they could compete with them directly in the future.
Unlike FinTech, Big Tech companies enjoy an established, loyal customer base along with access to large quantities of customer data gleaned from internet search activity, social media, and purchasing patterns. They also have substantial capital at their disposal. Thus, while currently, FinTech appears to dictate the direction and rate of technical innovation in financial services, the vast resources at the disposal of Big Tech provide a long term advantage.
FinTech Talent Trends
FinTech companies tend to attract talent from young, bright people. The driving force of FinTech is talent. The rate of growth of the sector means that there is an enormous need for skilled employees. FinTech workers in London alone outnumber those in Silicon Valley and New York combined. The UK expects the number of FinTech employees to increase from its current level of 60,000 to 100,000 by 2030, higher than the combined total of Singapore, Hong Kong, Germany and Australia.
The rapid pace of change and disruption is creating demand for creative and curious people who are able to move fast and find solutions. Whilst in a pre-Covid world we could add incremental innovations for marginal gains, the global pandemic has shown that we are at our best when we are solving genuine human needs and solving these problems more creatively than traditional banking. Fintech employers will need to ensure they are assessing for the skills they need such as curiosity, innovation and resilience.
On the other side, potential candidates want to know more around how their employer has been helping with their social and emotional well being. FinTech employers need to have an engaging story.
Given the need to move fast with the growth ambitions and with the, increased war for talent in the technology industry it is essential for FinTech firms to move quickly on their hiring decisions to ensure they don’t lose good talent to competition.
FinTech companies need to be prepared to work with a global workforce. Following the lockdown and the subsequent Work From Home, more people will be choosing to work remotely and may choose to be anywhere on the planet that has enabled wifi. Further, the pandemic has highlighted the scale of the world’s unbanked/underbanked and FinTech, companies will be looking to go beyond their borders to unlock value in these markets.