The relationship between Fintech and financial institutions (FIs) is in its third wave, according to Jeff Gido, Goldman Sachs's Global Head of Fintech. First, Fintech appeared as a response to an industry in crisis, when public opinion and customer satisfaction was at an all-time low. In the second wave, big banks began to take notice of Fintech, opening innovation labs and making investments in Fintech startups to hedge their bets. Now, they are beginning to see each other as partners in an ecosystem.
PwC recently published a Global Fintech Report which confirms there is a significant shift happening in both Fintech and traditional financial services. The report is based on analysis of over 1,300 interviews with leading financial services and Fintech executives. The key findings from the study involve collaboration within the ecosystem, incumbent innovation and consumer technology.
Three key findings from the PwC report
1. Ecosystem Collaboration
Fintech and financial services must collaborate to succeed.
The percentage of FIs who have already begun partnerships with a Fintech company is up from 2016, growing from 32% to 45%. FIs are able to provide an established customer base with access to a large dataset, while Fintech provides the experience and technology that those customers want. While many Fintech startups began with a desire to disrupt incumbents, it became apparent that the regulatory hurdles and staying power of large institutions would make full-scale disruption too difficult. When discussing collaboration in the financial industry, it’s important to make the distinction between early-stage Fintechs and established Fintechs. Many established Fintech companies, such as Agreement Express have the industry expertise and experience to collaborate on the complexities of FIs current systems and regulatory constraints allowing for rich enablement , bringing much-needed innovation to slow-moving organizations. The result is a new kind of ecosystem making financial services more efficient and agile, with a better experience for the consumer and enterprise.
2. Incumbent Innovation
To keep pace with changing technology, incumbents banks must do more than just partner with a Fintech; they must cultivate a culture of innovation.
To start a culture of innovation, traditional institutions can integrate the right technology with their existing legacy systems. Of the surveyed executives in the study, 74% were focused on integrating or replacing legacy systems in exchange for data analytics capabilities. 51% were focused on mobile, and 30% on automation.
PwC summarizes an innovative IT culture in one word: agile. While many organizations don’t have the resources or specific experience necessary to create new digital offerings in-house, they can create a culture of testing, iterating, and working with cloud-based platforms and tools.
3. Consumer Technology
According to the PwC report, financial services will be “unrecognisable in five years”, due to companies like Apple, Facebook, Google, and Amazon fundamentally changing consumer expectations for technology.
Consumer Fintech such as Robo Advisors and P2P Payments & Lending caught on partly because they functioned and looked like popular consumer technology — intuitively designed, simple, and built with the consumer’s needs in mind. This trend will accelerate through the rest of financial services. As Millennials and Gen Z investors grow older, the ‘consumerfication’ of financial technology will become the norm. For firms that are still primarily paper-based, digital customer onboarding will be a crucial first step.
Preparing for an unrecognizable future
Many financial services organizations know they need to prepare for a Fintech future, but aren’t sure how. PwC concludes their report with several recommendations for how traditional institutions can begin the work of preparing for an unrecognizable, consumer-centric, tech-oriented future.
1. Choose the right Fintech partners
There are many unproven Fintech startups with sizable funding capital, but limited implementations with real banks. It can be difficult to understand which vendors are established and able to solve real problems. PwC recommends taking a partnership perspective rather than simply a transaction vendor view. Look for firms that have complementary technology and talent.
2. Integrate to innovate
Some Fintech is designed to stand alone and are unable to integrate with existing systems or other Fintech. PwC recommends that firms “make use of modern cloud-based or open-source systems” that will “integrate new technologies in already existing architecture.” Cloud-based platforms will provide the foundation for collecting data and making intelligent decisions in the future. While not all legacy systems have an API, it is important that new technology integrate with these systems where possible.
3. Optimize for the customer
Optimizing with the customer’s perspective in mind isn’t just about surveys and feedback, but also about making data-driven decisions for the good of the customer. Customer feedback provides insights into what a customer thinks, but data shows what a customer does. Once a cloud-based platform is in place, iterate processes according to data analytic results. From understanding which forms yield the most customer errors, to knowing which part of the onboarding process consistently causes drop-off, an organization must begin to analyze and iterate around the customer.
4. Create a culture of innovation
Finally, innovation and agility must be built into the culture. According to PwC, a culture of innovation is one that attracts the necessary talent to move innovation forward in an agile way. Until a traditional institution has made innovation and agility a core value, they will fail to attract the right team members who can identify and implement the right technology to modernize an organization.
The new wave of Fintech has already begun. Fintech companies are more established and are positioning themselves as enablers of innovation for traditional institutions. To prepare for an unrecognizable future, financial services organizations will need to view themselves less as Fintech curators, and more as innovation partners helping to accelerate a more efficient, consumer-friendly future.
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