FinTech Jolts the Financial Services Market
Whether you call fintech changes to the financial services market disruptive, seismic (my favorite) or a technology tsunami, there’s no doubt: technology developments and customer expectations drive established companies to stay competitive by adopting new tools and practices.
What’s responsible for this turbulence? Capgemini analysts point to:
- Growing customer expectations of convenient, connected services.
- Lower barriers to market entry.
- The accelerated pace of technological evolution.
- Enthusiastic venture capital funding.
Financial Services Market: Ready for Change
Since the fintech revolution started with the founding of PayPal 20 years ago, the financial services market has been ripe for change. Here are three current reasons why:
- Customers comfortable with mobile connectivity want to engage with their finances the same way. This has led to mobile and off-premises banking.
- The need to know your customer (KYC) adds value to storing, handling and analyzing more data than ever. Getting value from this information has led to machine learning, artificial intelligence, and big data analytics becoming big enablers in the financial services industry.
- More sophisticated hackers and unauthorized data users require more sophisticated security solutions for finance at home, in the office and online.
Fintech offers solutions to these and many other financial services problems.
But what is fintech?
The Many Faces of Fintech
Fintech offers financial service companies many solutions to its problems. It’s no surprise that there are many different definitions of it, too:
- An economic industry composed of companies that use technology to make financial systems more efficient.
- A portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
- Technology applied to the back end of established consumer and trade financial institutions.
- Any technological innovation in the financial sector.
As diverse as these descriptions are, they have two capabilities in common: the ability to speed up financial services and make them more accessible to customers.
How Fintech Changes Financial Services
The FinTech industry offers this speed and accessibility by creating non-traditional platforms and processes. These products and services cater to customer expectations: ease of use, simplicity, flexibility, and convenience.
What Fintech Can Do
But how do fintech products and services contribute to the financial services market?
1.) Bring new tools and practices for financial services.
Fintech companies are bringing a whole new set of tools to the markets. New and established technology (such as big data analytics and visualization technology) is having a huge effect. Financial services companies are aware of their value in its current and future operations.
2.) Improve business performance. By automating formerly manual data handling methods and designing mobile services, for example, fintech services companies cut costs and operate more efficiently. Stripe financial services dramatically accelerate the process merchants follow to accept payments online. Old school: Legacy methods required five to seven days to set up a new merchant. New school: Stripe sets up a merchant web site and accepts payments within minutes.
3.) Create new financial services.
The variety of products and services that fintech companies offer is growing rapidly. The day when companies focused on payment applications, lending, and money transfers is long gone. Now, the industry’s reach has extended into more than 30 areas.
4.) Make services available to new customers.
Financial services providers are eager to develop new ways to engage in transactions that are more convenient, timely, secure, and efficient. Customer demand also drives the development of services for disadvantaged or low-income individuals, who are ignored or underserved by traditional banks or mainstream financial services companies.
Hotspots of Fintech Innovation
Where does this innovation come from? Mostly, from small startups that have been able to compete successfully with global financial conglomerates. These startups are independent vendors, who provide consumers with one or more specialized financial services. Generally, these startups have been in the market since 1998. To stay successful, though, they’ll have to develop products that address complex compliance and security challenges. Established financial services companies have not been asleep at the wheel. They recognize the need for new tools and methods. But they don’t have the technical expertise or the small-company attitude to compete effectively. That’s why legacy firms are taking an “if you can’t beat them, join them” approach. In a PWC survey, 82% of respondents expect to increase fintech partnerships in the next three to five years
Early Developers, Early Adopters
Here’s a shortlist of fintech companies that have already made their mark in the financial services market. (You’ll find a more extensive list of companies and how fintech enables them to deliver services in an upcoming post.)
- Consumer lending: Companies that lend money to individuals, through peer-to-peer lending and other methods. Examples: Lending Club, Prosper.
- Personal finance: Companies offering tools to manage their personal finances. Examples: Mint, Credit Karma.
- Consumer payments: Companies that enable business to business (B2B) or business to consumer (B2C) payments. Examples: Apple Pay, Samsung Pay.
- Payment backend: Companies that process payments and employee payrolls. Examples: ProPay, ADP.
- Point-of-sale payments: Companies that handle payments consumers make in a retail setting. Examples: PayPal, Square.
- Retail investing: Companies that provide retail investors with crowdsourced investment advice and tools that consumers use to make their own investments. Examples: Robinhood, Kapitall.
Next Time: We review how each of the technologies of fintech works and enables companies to offer a wide range of services to a growing number of customers.
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