Friend or foe? The impact of FinTech on banks
Monday 12 March 2018
“Traditional” banks have been a key player in the finance industry for centuries. However, as the digital revolution in financial services continues to accelerate, many of these incumbent banks are facing an increasingly difficult challenge with the ever-growing disruption of the banking industry from FinTech startups.
In 1994, Bill Gates famously said “Banking is necessary, banks are not”, speculating on the power of technology and how it could shape the future of the banking world.  Nearly 25 years later, the banking industry is experiencing its greatest ground shift in recent history. Banks are under enormous pressure to innovate and remain significant to an increasingly digital customer base who now have more readily available financial services and products as a result of the influence of technology developments.
FinTech can be described as the use of technology to transform how financial services are offered to end customers. These services broadly cover four key areas:
1. Banking: This includes digital platforms to monitor spending and savings, trading platforms, peer-to-peer lending, money transfers such as B2B (business-to-business) and B2C (business-to-consumer) by non-banks as well as FX (Foreign Exchange) services.
2. Insurance: This includes digital distribution platforms to provide insurance in a targeted manner and the use of data analytics to develop new insurance products, for example peer-to-peer insurance.
3. Asset Management: These services include algorithm-driven investments and automated advisory solutions more commonly known as Robo-advisors.
4. Other: This includes RegTech, which facilitates and streamlines regulatory compliance by leveraging new technologies such as big data and machine learning.
It is the area of banking that the impact of FinTech competitors is beginning to be felt the most, as they offer new solutions to customers with faster transaction speeds, ease of use and a wide choice of service providers. For instance, P2P (peer-to-peer) lending platforms give clients an alternative method for loans at a lower interest rate without bank intermediation.  Traditionally, anyone applying for a loan had to do so through a bank, resulting in numerous requirements, such as financial background checks and proof of ability to pay the loans back in the future, which subsequently made it extremely difficult for individuals with low credit ratings or businesses with no collateral needing to raise capital for investment. The breakthrough of the P2P solution allows borrowers to have loans financed by many different investors who lend their money for an agreed interest rate, usually determined by the borrower’s profile on a P2P platform whereby data from online sites such as eBay & PayPal is used to analyze the ability of borrowers to pay back debt, for example the number of sales/turnover. With P2P lending, a borrower can borrow money from multiple sources with a lower interest rate than the banks could offer, with repayments being made to each individual source. However, the main attraction towards P2P lending is that it allows access to financing that borrowers may not have been accepted for in the first place by applying at a bank. 
Traditional banks have always played a key role in the financial world. However, with the growth of technology and the rise of the digital revolution, it is no surprise the world has gradually evolved to digital banking. With the use of the internet and applications that today can be found on computers and smartphones, customers no longer need to be present in “physical” banks to complete deposits, transfers or payments. Instead they can do it all online, which has benefitted customers in multiple ways, not only saving them time but also saving them money through lower transaction costs. 
In today’s society, where everything is fast moving, consumers are always expecting ways to simplify their daily transactions, saving them time and effort. Debit and credit cards are items the average individual carries around in their wallets and uses daily, allowing them to complete transactions swiftly and without the need to carry cash. However, they still must carry the cards in the first place to make use of them. Through innovation, FinTech companies have developed a new payment approach known as Mobile Wallets, such as Apply Pay and Android Pay, which again simplifies transactions but more so maximizes utility for consumers by allowing the user to store their financial information on their phones, replacing the physical need for cards and cash. 
As FinTech companies increase consumer confidence in financial services, it is clear to see why venture investment has doubled in UK FinTech over the last year.  With banks facing loss of customers, especially millennials, and the landscape of the banking industry changing, banks have already realized that in order to compete with these agile, tech-driven organizations, they too need to evolve and innovate.  However, this is no easy task, as many banks operate under ageing legacy systems, making innovation and the adoption of new technology extremely challenging. In addition to the ageing infrastructure, the entrenched culture of banks will always lead to internal resistance to change, restricting their flexibility and making innovation an expensive process. Since the financial crisis of 2008, banks have diverted much of their capital to regulatory and compliance measures. However, with venture capital fueling most of the new innovations from FinTech’s, it has paved the way for collaboration instead of competition.
It is not just the incumbents facing challenges in this ever-changing industry, but also FinTech’s themselves. Banks have scale, capital and trust, all of which FinTech’s are striving to achieve. FinTech’s still lack the brand recognition that banks have firmly in place already, creating the challenge of convincing customers to leave a trusted brand. As the changing regulatory environment causes problems for FinTech’s to scale on their own, it is looking more plausible that we will see a collaboration between the two, as FinTech’s seek to gain market share that is currently dominated by banks.
However, with the introduction of the PSD2 (Second Payment Services Directive) in January 2018, banks could face not only the challenge of competing with FinTech startups, but also the threat of tech giants such as Amazon and Apple. The revised legislation was designed to boost competition in the industry by mandating banks to open their customers account information to third party vendors through Application Programming Interfaces (APIs). 
The introduction of these key players in the market would intensify the competition for market share, thus the obvious plan of action for banks would be to gain innovation through partnership.
Figure 1 shows the number of FinTech startups has rapidly declined in both the US and Europe since 2015. 
This could be a result of startups that once aimed to disrupt big financial institutions now collaborating with them instead. Many FinTech startups count incumbent firms among their key investors or have been directly acquired by them, resulting in startup formations declining in numbers as technological innovation moves in-house. Through collaboration, banks and FinTech’s could complement each other’s strengths, creating mutual benefits such as cost reduction, additional revenues and differentiation from competing institutions, all while improving the customers’ experience and putting the customers’ needs first.
Although we are still at an early stage of the FinTech revolution, it is evident that banks have stood up and taken notice. There is no time like the present for banks to start adapting and adopting these emerging technologies as they face the risk of losing consumers and, ultimately, profits. However, if they can focus their efforts in collaboration with FinTech providers it will allow them to focus even more so on their core business model while creating a competitive advantage over their competitors.
Graham joined FinTrU in 2016 through our third Financial Services Academy after graduating from Ulster University with a BSc Hons in Economics.
Since joining FinTrU, Graham has worked on the Regulatory Reporting Team for a leading Financial Technology firm. As part of this team, Graham worked with technology software to provide the solution to regulatory filings such as Annex IV, Form PF and CPO-PQR to aid fund managers, who have recently been compelled to report to regulators on a continuous basis. More recently, Graham has joined the Client Lifecycle Management team as a Know Your Customer (KYC) analyst for a Tier 1 Investment Bank. As part of this team, Graham is responsible for conducting investigations to ensure compliance with both internal and external regulatory requirements. He independently researches commercial databases, internal systems and the internet to gather and record data allowing him to execute sanction and negative news checks as well as trace Ultimate Beneficial Ownership of complex ownership structures.
During his time at FinTrU, Graham has completed a number of modules in his CISI Investment Operations Certificate, a professionally accredited qualification sponsored by FinTrU, specifically studying in Securities and Investments, UK Financial Regulation and Managing Cyber-Security.