Fintechs: Friend or foe?

Fintech companies may offer opportunities for valuable partnerships.

August 23, 2016

“Despite decades of advances in communications technology, data analysis—and pharmacological stimulants—bankers aren’t any cheaper than they were a hundred years ago,” notes an article at

“Thus the need for fintech disruption, more now than ever.”

The world of finance has been “stubbornly resistant” to technological innovations that relax prices and enhance efficiencies, the article notes.

For the last 100 years, Americans have remitted approximately two cents per every dollar that flows through the banking industry, according to research conducted by New York University professor Thomas Philippon.

Evolving technologies have expedited processes and the financial industry has benefitted more than others from such innovations, says Philippon. But these cost savings have not trickled down to consumers: “Either financial innovations have failed, or someone’s getting fleeced.”

The consumer more readily adopts technology and seeks cost savings and efficiencies. Is this a threat to your business?

Startups are challenged in that they confront “pesky realities” of traditional banking entities, like identity verification and development of truly secure systems.

Fintechs attempt to “go it alone,” the article says, but discover client acquisition is expensive. Risk and liquidity issues become a concern. “Eventually the company takes on the very qualities it arose to circumvent and sells itself to a bank.”

Do fintechs offer opportunity for valuable partnerships? What advantages and challenges exist in collaborations?

‘The world is moving, and a company that contents itself with present accomplishment soon falls behind.’ –George Eastman, entrepreneur

Are Fintech Startups Really Disrupting Banks?” asks Goldman Sachs 2015 estimates indicate $4.7 trillion of $13.7 trillion total financial services revenue is threatened by fintech providers in a range of services, including lending payments and wealth management.

Consolidation in the banking industry may be a result, the article notes.

“The threat of fintech is more real than ever before for banks” because consumers like the options they provide and “banks have ignored consumer demands for too long.”

Traditional providers are encumbered by infrastructure. They need to reconsider offerings in light of quickly moving digital technologies. They cannot compete without making change.

Areas where fintechs make inroads include fund transfer, mortgages, consumer finance and small-business lending—all vulnerable to “a big attack from the innovators.”

Consider that:

  • In 2015, $17 billion in U.S. loans occurred via people-to-people payments.
  • About 25% of “middle market lending” is facilitated by shadow banking entities.
  • Robo-advisors penetrated $20 billion in 2015.

In short, fintechs are poised to disrupt retail, corporate, and investment banking as well as insurance services.

Note “How FinTech is Shaping Financial Services” according to PwC. It is expected that by 2020, more than 20% of financial services business is threatened by fintechs. They alter financial services “from the outside in.”

Fintechs make progress where traditional institutions have faltered, and “disintermediation (is) Fintech’s most powerful weapon,” the report says.

Services most apt to be affected by fintechs in the next five years are consumer banking, fund transfer, and payments. People and businesses lend directly to each other, and new credit models utilizing atypical data sources apply analytics to determine and price risk.

At the heart of disruption is customer experience, according to the report. Fintechs are easy to access, products are customized, and “the pursuit of customer centricity has become a main priority.”

Traditional players respond by designing new ways to engage customers, and will enlist fintechs “to provide customer experiences on a par with large tech companies and innovative start-ups.”

Established players can improve upon tradition and “partnerships with fintech companies could increase the efficiency of incumbent businesses.” Seventy-three percent of survey participants say lesser costs are the biggest opportunity in collaboration with fintechs.

Other advantages might include client retention, greater revenue, and differentiation of services offered.

Regulatory issues pose challenges in collaboration: 86% of financial services CEOs believe over-regulation will affect growth.

Those seeking collaborations can:

  • Encourage innovation in corporate culture;
  • Consider new business models as “big corporate structures” are not good fit;
  • Develop agility and be willing to take risks;
  • Interact with staff digitally as talent acquisition strategies evolve;
  • Develop staff via local networks to grow digital skills; and
  • Nurture an appealing employer brand that is tech friendly to invite startups.

‘Technology is just a tool.’ --Bill Gates

Do fintechs rely on traditional financial service providers?

The answer is yes, according to an article at

“FinTech startups could not exist without banks,” the article notes. Since most people use traditional providers to some degree to conduct financial business, fintechs need financial user data available only to such entities.

However, fintechs bring “cutting-edge technology that banks don’t have” and thus have a competitive edge.

“In the current climate, then, it seems that there’s much more of a give-and-take relationship between fintech and banks; one that both institutions would be wise to capitalize upon.”

See an Accenture report, “Fintech and the Evolving Landscape: Landing Points for the Industry” to learn that since 2010, in excess of $50 billion was invested in 2,500 organizations to “redefine the way in which we store, save, borrow, invest, move, spend and protect money.”

In 2015, values of fintech investments rose 75% to $22.3 billion.

Banks are driven to cut costs and grow closer relationships with consumers, and “larger technology and platform players may offer a more attractive set of rails” for service delivery, according to the report.

There are two kinds of fintech companies: competitive (those that challenge existing providers) and collaborative (those that work to provide solutions for incumbents).

Existing institutions see value in the collaborative types in driving business evolutions, but both types of fintechs are more apt to see traditional providers as possible partners.

In the prior year, fintechs hoping to collaborate grew 138%; now comprising 44% of all fintech investment.

“So while there is still more investment going into competitive fintech companies, there is a clear and growing appetite, from both sides, to collaborate,” says Accenture.

Finally, consider the consumer’s perspective in another PwC report, “Fintech: Redefining Banking for Customers.”

Here, fintech “will impact the entire ecosystem of the banking industry by redefining the mode of interactions.”

Four trends will influence banking:

  1. User experience;
  2. Increasing variety of payment methods;
  3. Robo-advisors; and
  4. Lending platforms.

Customer experience prompts evolutions and providers need to adjust to their expectations and growing adoption of technology. Customer service is important—50% of incumbents think they are customer-centric, compared to beyond 80% of fintech providers who think so.

Seventy-five percent of participants believe fintech’s most critical influence is to grow “customer focus.”

“The future of banking will focus on providing cheaper and easier-to-use propositions to end customers,” says PwC. “Banks must continue to enhance customer experience… they should partner with fintech by utilizing their innovations.”

Embracing challenges to existing models can be difficult.

Actress Mary Pickford once observed, “Adding sound to movies would be like putting lipstick on the Venus de Milo,” a comment suggesting sound would detract from films rather than enhance them.

Of course, today’s movie-goers could not imagine a sound-free film. We have come to expect the merits of sound technologies.

How will new technologies that fintechs provide enhance your operations?

LORA BRAY is an information research analyst for CUNA’s economics and statistics department. Follow her on Twitter via @Bray_Lora and visit the CUNA blog, The Research Roundup: Economic Perspectives.