There really is no overstating just how operationally different a fintech company is to a traditional, established, financial services organisation.
Fintechs are digitally native companies – they’re born on the cloud – and this imparts a high degree of agility into their DNA. It makes them capable of analysing customer data in creative ways and offer new, personalised services that cut right to the heart
of their user’s challenges.
One could even change its entire business model overnight, and the biggest impact to its customers would be a software update and new terms of agreement that would be so seamless an experience, they would probably go unnoticed.
For traditional financial services vendors – many of which have been around for centuries – this hyper-agile mindset runs counter to their DNA. Nor was it the mindset that regulators had when many of our established financial institutions, such as banks
or insurance providers, were created long ago. And this is why many fintech companies operate along different regulatory guidelines, some not even requiring a banking license.
Technology has fundamentally changed our collective approach as to what is required from a financial services institution, and it’s not how these large institutions were geared to work, which is why they’re losing market share to these ‘new kids on the block’.
However, there are other advantages that come with being an established financial services institution: capital and resource. Traditional firms have three key ways that they can combat the rising tide of challenger start-ups popping up –
compete, support or acquire – and in this piece, I will consider the merits of each.
Compete: old school vs new school
For a long time, competing with fintechs not only seemed like the obvious option, but also the easiest. Afterall, traditional vendors had a significant head start on their new, digital competitors. Even without all their technology, they had the customer
base and – perhaps most importantly – an established reputation.
However, time quickly revealed that being customer-led the way these challenger fintechs were able to be was too powerful a motivator to ignore, and large organisations realised they had to compete more directly.
But when you’ve been doing things a certain way for so long, it can be hard to muster the change needed internally. That’s why some organisations resort to creating separate teams, divisions, or entirely new fintech businesses of their own to gain new technology-fuelled
capabilities such as DevOps or cloud services.
The hope is these new agile features will filter into the operations of the larger establishment, making it more attractive and competitive to customers in the modern financial services arena.
Support: if you can’t beat them, join them
The hierarchies, red tape, technical and organisational debt (legacy technology and old, redundant processes that slow down innovation) and others are features of large, established organisations that aren’t exactly easy to shake off. They bleed into every
corner of a business’ operations and are antithetical to what gives a fintechs its magic – agility and technological innovation.
That’s why many of these large organisations find it’s not enough to just create a team or division within their business. Sometimes, they feel they need to take themselves as far out of the growth process as possible and instead support a new, separate,
fintech’s growth as opposed to creating one themselves.
Often, they’ll take a stake in a fintech startup early on and provide it with an incubation hub for its initial stages of development, feeding it with funds and resources until it’s ready to take on the world.
Not only does it free the burgeoning fintech from the sticky nature of its larger benefactor, but it reduces the direct risk – financially and reputationally – for the established organisation.
Acquire: if you can’t beat them, buy them!
When a large financial services business feels like competing is too arduous and supporting a new fintech will take too long, often they have the resources necessary to simply buy a fintech startup that has already gone through the early stages of development
and is already showing financial promise.
As you can imagine, this is the most expensive option of the three, but it’s also the least risky. The business knows what it’s getting and can start recouping its investment almost immediately.
However, the large businesses often don’t just pick one option – they diversify their approach with a mixture of all three. They begin incorporating more digital tools to placate their existing customers’ growing needs, support a nest of burgeoning fintechs
and acquire other more established fintech businesses, or small digital businesses, to give it new capabilities.
Change starts internally
Whichever direction large financial service businesses decide to go, it’s crucial they first begin the hard work of shifting the existing internal mindset. Many are so stuck in their ways that whatever option they go for, it will still be hard for them to
adapt. So, they need to be open to change and learn from the fintechs they get involved with if they want to have a chance of that agility rubbing off on them.
On this front, the Covid-19 pandemic has been an incredible catalyst for change in many large organisations. It has forced them to adopt new technologies and work practices simply to stay operational, and it has already had an impact on many of these firms.
By hanging on to this mindset and continuing to foster cultures that value adaptability, agility and change, it will make them more likely to succeed, however they end up entering the fintech arena.