HOW FINTECH AND ECOSYSTEMS ARE RESHAPING FINANCE

Theo Dix

Looking back to 2015, the word FinTech brought palpitations to many leaders within the financial services industry. This shiny new word represented nimble tech-driven businesses ready to take on the big giants – and quickly displace them. They had seen this happen with the entertainment and retail sectors, and the omens were out that financial services were next. Consumers and businesses were frustrated with the pace of innovation, while industry giants worried that their archaic systems and processes could mean that meaningful transformation was beyond what they could deliver anytime soon. Theo Dix explains.

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But fast-forward six years, and things have played out very differently within the financial services industry. The global giants are still around, and many are thriving, with FinTechs playing a pivotal role in enabling their products and service offerings rather than destroying them. So, what happened? In 2015, many FinTechs start-ups thought specific sectors such as banking were ripe for the picking and focused on consumer-driven offerings. 

However, what lots of them failed to realise was the consumers weren’t ready to jump ship, with the average Joe being far more likely to trust their cash with a reputable bank led by a seasoned industry veteran than a young start-up, run by some ‘kids’ from a garage. Some of these new start-ups also underestimated what a colossal endeavour is to get licensed and build the proper governance and compliance structures. Regulators still trusted the incumbents despite the challenges that the 2008 financial crisis had brought about. Back then, not many were keen on creating the enabling regulatory environment we have today for FinTech to thrive. 

The resultant effect was that many new and old started to realise that they might be better off if they collaborated rather than compete. Pivoting to a business-to-business (B2B) model, many FinTechs are now the technology providers underpinning the bank’s services or the products they provide to their customers. The focus is generally on a small part of the value chain, which they look to enhance. Taking banking, for example, foreign exchange, cross-border payments, wealth management offerings, personal financial management apps, working capital and trade finance solutions are a few areas where we have seen a fair amount of traction. 

“as sector lines blur, the potential for financial institutions to become core to the future digital marketplace, and their customers’ lives, is almost limitless.”

That is not to say that some new players did not plough ahead and compete for head-on against the incumbents. For example, look at the local payments landscape, where neo-bank Revolut has become the de-facto payment method for Malta’s younger generation. Some of their parents are looking to pay for low-value goods and transfer money between friends and family. However, many customers opt to maintain accounts and relationships with both and use them for different services rather than replacing our local banks. The exciting thing is that, like the traditional financial services giants, Revolut also enhances its operations and services by incorporating third party B2B FinTech services. 

Ecosystems and partnerships are seen as the only way to succeed in today’s market, according to two-thirds (68%) of corporate business leaders surveyed in EY’s recent research, Tech Horizon: Leadership perspectives on technology and transformation, in which we surveyed 500 corporations and 70 start-ups across a range of global geographies and sectors. 

A “do it ourselves” culture has prevailed in business for many decades, and working with another party – even a competitor – to solve the issue would be very rare indeed. But in the digital world, companies must break free of this mindset and become more collaborative and open to partnerships, rapidly disassembling and re-assembling value chains. This is because, as we have touched upon, no single company can be an expert in all areas of digital technology.

As financial institutions acknowledge the inevitable shift towards ecosystems, they will have to determine exactly how to participate and redefine business and operating models to suit. They must choose their strategy wisely, based upon their strengths, decisions around customer ownership, focus within the value chain and revenue generation model. 

They also need deep analysis around partner fit, capabilities and onboarding that cuts through all the marketing hype based on actual FinTech industry knowledge.

If ecosystems were strictly industry-specific, their value to financial services companies would not be fully maximised. But, as sector lines blur, the potential for financial institutions to become core to the future digital marketplace, and their customers’ lives, is almost limitless. For those financial institutions that are yet to set their ecosystem strategy, the time to do so is now.

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