Fintech’s Role in the Digital Transformation of Banking

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The road to digital banking is well underway and there is no turning back.

But the digital transformation means more than merely providing technological solutions. It requires a comprehensive review of the entity’s business model and deep restructuring of its digital culture. It requires renewed focus on the customer and incentive models, while addressing head-on the criticism banks are receiving in their transformation to digital services. All of this is fundamental for true transformation and the survival of the banking sector.

For the most part, the financial sector is not very accustomed to disruption from external competitors, and the emergence of “Fintech” startups. Fintech comes from the blending of the words finance and technology. As defined by Wikipedia, Fintech encompasses services or financial companies that leverage the latest technologies to create innovative products. And these companies have created a sense of alarm in the industry.

In fact, the possibility that banks who don’t make this adjustment may be removed as intermediaries (as they have been from other industries) has become a popular conversation topic.

As a result, global investment in Fintech companies tripled in 2014 from the previous year, reaching USD12.2 billion. According to a study by Accenture, a very important part of these investments took place in the U.S. The same report, however, notes that Europe is the fastest growing market for such investments, with an increase of 215% in 2014 over the previous year, representing about USD1.48 billion.

There are a variety of services provided by Fintech. As such, we could classify them by the following groups in their competitive position against the banking sector:

1. Fintech companies serving customers that are not target clients for banks. The most prominent examples are crowdfunding platforms and P2P Lending, which both finance ideas and companies that would be difficult to find funds otherwise.
2. Companies that exploit inefficiencies in banking processes and promise better service. In this segment, technology is applied to provide faster and cheaper service than that which is offered by banks. The most prominent examples are Forex trading platforms, in which Fintech companies connect buyers and sellers to trade currencies faster and cheaper.
3. Companies that compete directly with banks offering similar services to the same target customers. These are usually profitable sectors such as Private Banking, where personalized treatment offered by banks to their customers is being threatened by portfolio management and financial planning tools that build risk profiles and personalized analysis’ and recommendations through tailored questionnaires for clients and sophisticated algorithms.
4. Companies that build on existing bank infrastructure from a technological perspective, thereby offering better service, through technology, data and proximity to customers, to offer new services such as mobile payments, aggregators or Big data companies. In this scenario, the client benefits from a better range of services, and banks and Fintech companies benefit from the new market spread. It’s threatening traditional banks with losing their client relationships.
5. And finally, companies that offer disruptive products and services capable of transforming the financial industry, such as Bitcoin and its decentralized structure (Blockchain) as a prime example. To better understand how Blockchain can be applied, I highly recommend Arvind Krishna’s article “Blockchain: It is Really Big Deal”.

With all these challenges, clearly traditional commercial banking needs to evolve into digital banking to maintain a competitive position. That will produce a banking sector capable of establishing relationships with customers anytime, anywhere, using the power of data while providing a unique customer experience.