Keeping up with FinTech
Since 2008, investment in the fintech (financial services technology) sector has tripled and is expected to reach $8 billion by 2018, according to a recent report by Accenture. The fact that the rapid development and expansion of the fintech sector started at the same time as the last recession is no coincidence.
During that time, traditional banks tightened access to credit for small businesses and consumers. They also focused on asset quality and preservation of capital rather than innovating and investing in new technology. Yet, throughout the past few years, as digital technology quickly evolved, customers across all segments began demanding access to their accounts exactly when and how they wanted it. As a result, banks have been playing catch up to meet the digital and mobile expectations set by their customers.
What’s interesting about the surge in (and success of) fintech investment is that even the smallest companies are succeeding. The surge in innovation is being led by entrepreneurial visionaries, not the large technology providers who have served the industry for decades. According to a recent article posted by The Economist, fintech startup revenues are worth an estimated $4.7 trillion. Though a few banks have begun to invest in fintech startups, this is the exception rather than the rule.
This needs to change. Rather than constantly playing follow-the-leader and trying to keep up with the guy across the street, banking executives must be willing to demonstrate leadership. They need to learn from their customers – listen to what they want and be innovative in their solutions and services. Bankers need to get to the point where customers don’t realize what they want until banks give it to them. This approach requires that banks create internal innovation units that are not confined to the current culture and product thinking.
The real industry leaders will not only integrate innovation into their cultures, they will participate in the funding of startups through innovation funds. Just as banks set up clearinghouses and ATM networks in the past for the mutual benefit of the industry, they should regain the position of leadership in today’s fast-evolving financial services environment.
For example, after Apple introduced Apple Pay late last year, several large banks and credit unions quickly announced that they would participate. Was it the anticipated Midas touch that is associated with Apple that got so many banks to jump on the bandwagon? Or was it a realization that banks must be prepared to accept and accommodate the next level in payments technology?
In a recent investor update, JPMorgan Chase reported that more than one million of its customers have provisioned debit or credit cards with Apple Pay and the number is growing each month. Bank of America reported over 800,000 customers using the service. This experience is common with the now more than 750 financial institutions supporting the Apple platform. Apple is not the first to provide a mobile payments product, but it is the most successful due to its ability to address consumer needs and behavior with simplified and safe payments. The only limitation on the growth of Apple Pay is the transition period for Apple phone users to migrate to the newer Apple Pay-enabled devices.
The Apple solution is the most widely reported example of fintech development outside of the industry but not the only. Late last year, Wells Fargo announced the launch of a fintech accelerator lab providing minority equity capital and business coaching to new companies developing products that will bring innovative solutions to the bank. Wells Fargo is providing boot camp sessions for innovators and access to internal business lines to explore opportunities and development theories.
Banks have the most to gain but also the most to lose in an environment of innovation and rapid change. Continued growth requires the need to understand and meet the changes, needs and wants of customers. Although nonbanks such as Apple will sometimes lead the way, banks need to adopt a more aggressive and participatory role in development.