Fintech: Banks get into the game

As innovation disrupts and transforms industries across the economy, banks are vulnerable. A rising generation of consumers dismisses them as backward, high cost intermediaries. Enter financial technology or “fintech” companies funded by a flood of venture capital investment. Now banks are waking up and responding.

Fintech companies operate in dozens of countries and are chipping away at the financial services industry by offering products and services once available exclusively through financial institutions. Fintech is using technology to transform how consumers and businesses save, borrow, invest and move money.

Fintech has attracted the tech giants. Amazon has its own lending service for small businesses, which has provided $3 billion in loans since it opened in 2017. Millennials are clearly more receptive to buying a financial product or service directly from a tech company.

While the EU fintech market is still dwarfed by those in China and the United States, the trend of EU regulation is toward flexibility for start-ups and alternative businesses, for example allowing non-banking firms to perform payments activities and gain access to customer data. The Revised Payment Services Directive (PSD2) will come into full force in 2018, allowing a wide range of firms to become payment services providers.

Banks are waking up and reacting to the problem in various ways. Some are forming joint ventures with fintech companies. For example, in the U.S., JPMorgan Chase has an alliance with OnDeck, an online lending platform for small businesses. Banks are also active as fintech investors. Quicken, for example, raised $1.25 billion in a bond sale partly underwritten by Credit Suisse Group AG.

Other banks are looking to M&A. They think that regulation will increase as fintech companies experience risks associated with traditional banking, for example as peer-to-peer lenders start to securitize the loans they originate from their platforms. And since fintech companies use small, interconnected IT platforms and the public cloud, they may be particularly exposed to cyber risk. Some banks feel they if they own fintech operations they will be able to control their risks by leveraging their compliance infrastructures.

Other banks and traditional financial services firms are emulating fintech’s emphasis on technology—by investing in big data and advanced analytics to understand customer needs and deliver services via mechanisms ranging from mobile phones to wearables. Their strategy is to build a comprehensive data ecosystem to access customer data from within and beyond the bank.

Banks are waking up to the threat posed by fintech. While banks are unlikely to disappear, the emerging world of financial services promises to be very different from what we have known in the past.