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Impending fintech apocalypse or just old-fashioned hype?

Over the last few years, venture capital funds have poured billions into fintech and the frustrated investment bankers and traders that launched the sector. But how close are we really to the complete disruption of the banking sector? I believe that we are a lot further away from a full disruption than the media, conference organisers and thought-leaders would have us believe. But that doesn’t mean it’s not something to watch out for.   

Fintech is currently an evolution rather than a revolution in re-architecting the financial sector as the core business structure of how money moves around the world remains largely the same. In spite of how the consumer engages at point of payment, money still moves between banks - the bank that has the money (issuer) and the bank that receives the money (acquirer).

What fintech is doing, is creating competition at different layers. Things are changing at the customer experience level such as the point of issue and point of transaction, but the back-end itself, which is 90% of the functionality, will take much longer to evolve.  

Banks that are strategically aware are realising that acquiring channels will be harder to retain and issuing is where they need to focus. Therefore, we should see companies on the issuance side doing more to promote the use of their own branded credit cards as part of loyalty programmes.

The real opportunities for disruption lie on acquiring side.  Banks are going to be affected badly, especially those that over-charge for acquiring. There are new products and services in fintech that will start eating the banks lunch with their own mobile POS devices.

Apple Pay and Google Pay will also cause banks to lose out on the acquiring chain as it places itself directly in the middle of consumer and bank. Once we start to see that level of core process interference, then we can start to talk about fintech as a disruption, rather than an evolution.

Financial services providers need to get very clear about their value proposition, what they are good at and where they need to partner. This is where integration comes into play -  leveraging technologies to create a complete customer experience, but through partnerships and integration rather than internal developments and management.

There is a move by international banks, such as ING, to provide Application Programme Interfaces (APIs) to innovative fintech companies, exposing their ‘rails’ so that it’s easier to create new ways of interfacing with the bank.

The true shift from hype to real change will be complete once fintech starts becoming part of the everyday for large, entrenched service providers and not just for small, entrepreneurial teams.

Payment partners can help banks and retailers implement and manage these new rails and interfaces. For example, when banks manage to realise and extract the efficiencies possible in say, cross-border payments, from new options like Ripple over SWIFT, then fintech disruption becomes real. These changes require that the industry change and the momentum will be slow and happen far more gradually than the hype would have you believe.

Banks have huge assets they can leverage in competition and collaboration with fintech players. They’re extremely good at processing vast volumes of transactions at scale in a very secure way. More importantly, they currently hold a validated customer's account, and enjoy the trust of their customers - trust which FinTech startups can (currently) only dream of. Inspiring industry-wide change especially at a customer behaviour level is a difficult challenge which is only remotely made possible by big players with massive influence and deep pockets.

We’re at the beginning of a long journey to re-imagine the customer experience for a new digital generation. Short term, banks aren’t going anywhere. Long-term, how banks rethink their business models remains to be seen, but don’t bank on an apocalypse.


Comments: (2)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 19 February, 2016, 18:06Be the first to give this comment the thumbs up 0 likes

Can you name any fintech product / service that will "start eating the banks lunch with their own mobile POS devices"? *ALL* mPOS vendors I know continue to need a bank as acquirer and pay full MSC / MDF to acquirer banks. Whatever they charge for their service, they recover by way of higher fees from merchants. More in my blog post Hiding Your Secret Sauce.

Can you explain how Apple Pay and Google Pay will "cause banks to lose out on the acquiring chain"? They might place themselves between the consumer and the acquirer bank but they don't disintermediate the acquirer bank. Even when a customer pays by plastic card, the merchant sits between consumer and acquirer bank. As a matter of fact, as I'd highlighted in my post Apple Puts Banks Squarely At The Center Of Mobile Payments, Apple Pay actually puts banks right in the middle of the payment chain instead of disintermediating them.

Ian Ogilvie
Ian Ogilvie - Ogilvie Advisory - Sevenoaks 19 February, 2016, 19:18Be the first to give this comment the thumbs up 0 likes

Strongly agree;  it is also worth reflecting that, not so long ago, when cash was king, most commercial payments happened without bank intermediation, once the cash was withdrawn by the spending customer.  Being involved in processing each payment is a cost to banks (albeit increasingly small where it is 'straight through') not a revenue in many markets.

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