7 Strategies for Financial Institutions to React to Financial-Technology Companies

Over the past decade, the finance industry has undergone a significant transformation with the rise of financial technology companies, commonly known as fintech. These companies have disrupted various sectors within finance, starting with payments and subsequently expanding their influence across the entire industry. Even traditionally secure areas of finance are now facing competition from new players and innovative challengers. Here are some of the sectors that have witnessed substantial innovation due to technology-focused startups.

• Wealth and Asset Management: Fintech has introduced new ways of managing wealth and assets. Robo-advisors, for instance, use the power of algorithms and artificial intelligence to offer automated investment suggestions and portfolio management services. With these platforms, customer experience convenience, lower fees, and access a wide range of investors that democratizes the wealth management landscape.

• Wholesale Banking: Fintech companies have entered the domain of wholesale banking, catering to the needs of businesses, institutions, and corporations. They offer solutions for areas such as cash management, supply chain finance, invoice factoring, and trade settlements. These innovations help in streamlining processes as well as enhancing efficiency, and provide quick access to capital, eventually benefiting businesses of all sizes.

• Regulatory Technology (RegTech): Fintech startups have addressed the growing regulatory complexity by developing regtech solutions. These technologies help in automating compliance processes, monitoring suspicious transactions, and ensuring adherence to regulatory requirements. Regtech not only reduces the compliance burden for financial institutions but also improves risk management and strengthens the overall integrity of the financial system.

• Trade Finance: Fintech companies are innovating trade finance by digitizing and streamlining traditionally paper-based processes. They offer solutions such as digital trade finance platforms, supply chain financing, and smart contracts. These advancements improve efficiency, reduce costs, and enhance transparency in international trade, benefiting both buyers and suppliers.

These examples demonstrate the wide-ranging impact of fintech on the finance industry. By leveraging technology, startups have introduced disruptive and innovative solutions that challenge traditional financial institutions and incumbents. As the fintech companies continue to evolve and collaborate with established players, they are likely to drive further transformation and shape the future of finance.

The primary focus for fintech companies goes beyond capturing market share. Their main goal is to reshape customer expectations and introduce new business models. Fintech firms achieve this by building their technology infrastructure from the ground up, which not only highlights the deficiencies of traditional financial institutions in terms of digital user experiences but also in operational efficiency. The emergence of "neobanks" and their potential disruption of retail banking may also be of lesser significance compared to the fact that they expose users and customers to the possibilities of a modern, digitally-driven banking experience.

In essence, fintech companies are driving change by redefining what customers expect from financial services. They are leveraging technology to provide seamless user experiences and operational efficiency, which traditional institutions often struggle to match. The impact of fintech goes beyond market share; it lies in the transformation of customer expectations and the exposure of users to the potential of a digitally-driven financial landscape.

The leaders of financial institutions can consider seven potential reactions that can be pursued individually or in combination:

1. Buy a fintech: Acquiring a fintech company can be a strategic move that fuels growth, even in an environment where valuations are high, especially for the most prosperous and prominent fintech firms. Established financial institutions may choose to purchase a company based on its market success (customer base, loan portfolio), cutting-edge technology (user experience, core systems, advanced data capabilities), or talented workforce (engineering, product management, executive leadership). However, the key to success often lies in their ability to effectively integrate the acquired company after the transaction is completed.

   

2. Embrace Innovation: Leaders can proactively embrace innovation by fostering a culture of experimentation and exploring partnerships with fintech companies. By collaborating with startups and leveraging their technological expertise, traditional institutions can introduce new products, services, and business models to meet evolving customer needs.

3. Partner with a fintech: Collaborating with a fintech company through a well-planned partnership can offer several advantages, including accelerated time to market and cost-effective implementation. The primary objective is to achieve tangible business benefits by accessing new customers or enhancing back-office operations, ultimately leading to improved bottom-line results. Leaders can explore strategic partnerships to leverage complementary strengths, access new markets, share resources, and accelerate innovation.

   

4. Invest in fintech: Making investments in fintech companies often serves as a means to gain deeper insights into the industry and mitigate potential risks posed by disruptive forces. Established financial institutions have the option to invest in companies they collaborate with or concentrate on areas they are familiar with or find intriguing adjacent opportunities. It is advisable for these institutions to maintain a certain level of independence from their corporate venture capital groups, allowing them to attract skilled managers. Recently, there has been a growing trend of investing in external fund managers who specialize in financial technology, indicating heightened interest in this space.

5. Transform yourself to be more like a fintech: Digital transformation is a challenging yet important process for most financial institutions operating currently in the market. Redesigning the core infrastructure to be more dynamic, delivering a new agile operating model, and upgrading technology as well as skills of the workforce are key to mitigating outside threats, both fintech and otherwise.

6. Build your own (internal) fintech: Embarking on the journey of building an internal fintech solution is a strategic approach for financial institutions. While the process of transformation typically takes years, the competitive pressure from fintech companies is already present today. In response, more and more financial institutions are striving to outperform fintech’s in their own domain or proactively disrupt areas of their business before others can. The key to succeeding in establishing new digital ventures lies in combining the agility, speed, and talent of a startup with the inherent advantages of an established institution. This can be achieved by leveraging existing assets such as a customer base, distribution channels, or infrastructure, giving the institution an "unfair advantage" in the market.

   

7. Serve the fintech’s: Some financial institutions can discover their competitive edge by developing robust and streamlined technology and operational capabilities to facilitate the integration of financial services into the customer experiences of others. This business model, known as "banking as a service," revolves around establishing a profitable approach to white-labeling while drawing inspiration from prominent technology platforms. The focus is on empowering not only fintech companies but also collaborating with major technology firms, retailers, telecommunications companies, and other entities to enhance their customer experiences. The scope of enabling others has expanded rapidly beyond fintech’s, encompassing a wide range of industries and sectors.

It is crucial to note that the optimal approach for financial institutions is often not limited to a single option, but rather a combination of strategies. Each strategy, whether it's internal transformation, partnerships, M&A, or internal digital-business builds, comes with its own complexities and requires thorough planning and implementation.

Adopting Internal Strategies to be Fintech-Ready!

In addition to a strong fintech strategy, leaders can work towards a series of measures internally to leverage the digital transformation, offered by Fintech.

• Enhance Digital Capabilities: Recognizing the importance of digital transformation, leaders can invest in upgrading their institution's digital capabilities. This includes improving online and mobile banking experiences, streamlining internal processes through automation, and adopting emerging technologies such as artificial intelligence and blockchain.

• Customer-Centric Approach: Shifting the focus to customer needs and preferences can be a powerful strategy. Leaders can prioritize delivering personalized experiences, improving customer service, and leveraging data analytics to gain insights into customer behavior, enabling them to tailor their offerings accordingly.

• Regulatory Adaptation: Given the evolving regulatory landscape, leaders can proactively engage with regulators to stay abreast of changing requirements. By actively participating in discussions and contributing to the development of regulations, financial institutions can shape the industry's future and ensure compliance while maintaining a competitive edge.

• Talent Acquisition and Retention: Building a skilled workforce is crucial for success in the digital era. Leaders can focus on attracting top talent with expertise in emerging technologies and fostering a culture of continuous learning and innovation. Additionally, retaining existing talent and upskilling employees can contribute to the institution's digital transformation efforts.

• Agile Organizational Structure: Adopting an agile organizational structure enables financial institutions to respond swiftly to market changes and customer demands. Leaders can embrace cross-functional collaboration, empower decision-making at various levels, and create a culture that encourages flexibility and adaptability.

In recent years, the most successful incumbent financial institutions have shifted from focusing solely on internal transformation and partnerships to showing greater interest in M&A activities and developing their own digital businesses. However, it's important to recognize that every financial institution is unique and should determine its own strategic response to the competitive threats posed by fintech companies.

While the strategies employed may differ, one common factor remains: fintech’s are targeting value pools across the entire sector by capitalizing on increased digitization, rising customer expectations, and operational efficiencies. Financial institutions must adapt to these changing dynamics to stay competitive in the evolving landscape of the industry.