Mike Baur’s first article on Affiliate Dork gained popularity quickly and garnered much interest and even requests for more, similar articles. Mike has kindly agreed to lend his expertise on FinTech as he is well-versed in finance, technology and startups.
Don’t Be Afraid of Disruptive Tech in Finance
Disruptive technology has been the name of the game in business since the digital revolution. We’ve watched as internet-based businesses like Amazon and Netflix have fundamentally changed the way that whole industries operate. We’ve seen, too, the way that technology has become “smarter,” creating a world that’s more connected, faster-paced and centered on convenience. It was inevitable from the beginning that this disruptive technology would work its way into the financial sector, and banks are beginning to feel the pressure of an explosion of apps, products and digitally-based companies servicing the world’s financial demands.
“Fintech” is the term for finance-related technology and innovation, and it’s exploded recently with a number of startup companies producing innovative solutions to the finance industry’s ongoing problems and needs. Fintech encompasses everything from peer-to-peer money transfer apps, digital investment platforms, loan application algorithms and more, and startup companies around the world are innovating new products and solutions every day.
Fintech is poised to play a different role in the future development of finance, however, than what some might expect. Disruptive technology does not always mean fundamental changes to an industry; in the case of fintech, the changes on the horizon are largely positive for those already in the industry. By embracing technological advances and innovations, financial institutions can continue to stay relevant in a constantly shifting environment. In order to do that, though, they will need to learn to respect and accept the small startups. These innovative businesses are not the enemy; they are a powerful potential ally. If anything, tech giants like Apple and Google pose a greater threat to banks than any fintech startup.
What Does Fintech Do?
In order to understand fintech and the competition of tech giants, startups and the traditional finance industry way of life, it’s important to remember how the finance industry traditionally works.
Finance is the backbone of the economy. Banking goes deeper than simply storing money for future purposes, although the safekeeping of assets is one crucial element. The financial sector is responsible for processing transactions, driving trade, as well as handling investments and the raising of capital. A more efficient finance industry is, in other words, the lubricant to facilitate every economy-boosting activity.
With that in mind, it’s easy to see why the problems facing the finance industry would need swift and effective solutions. And in a post-recession environment, where the failures and shortcomings of the big banks are thrown into sharp relief, there have never been more obvious opportunities for growth, change and disruption within the finance industry.
Financial Problems Demanding Tech Solutions
The global economy is affected both directly and indirectly by the finance industry, and certain shortcomings in banking have left opportunities wide open for technological solutions.
Some problems that could be addressed by fintech include:
– Limited access to banking in some areas of the world
– High costs of certain financial services
– Financing gaps for small enterprises
– Inefficient processes
Lending and financing, for example, is one of the most important roles of modern banking, and it’s something that is fraught with inefficiency. Banks frequently require potential borrowers to visit the bank in person to fill out paperwork, and the necessary credit checks and approval process can take time. Online loan applications coupled with algorithmic approval criteria can shave off time, boosting efficiency and reducing cost. Private companies offering this type of product can outstrip their traditional competition, and this is just one of many examples of how simple fintech solutions can prove to be disruptive to the traditional banking model.
The financial sector has traditionally been eager to adopt new information technologies, and fintech can provide solutions for improving the efficiency of banking and financing. Improved opportunities for automation and analytics can streamline existing processes and empower customers with greater knowledge and choice in their financial decisions.
In many ways, this has already happened. Consider, for example, the simple banking app. Checking a balance or making a payment with a smart phone has become such a ubiquitous part of life that it’s easy to forget how new it is. It wasn’t so long ago that people needed to do their banking in the bank, or at least over the phone; these days, technology has disrupted the need to balance a checkbook.
Crowdfunding, too, has been massively influential in the changing landscape of financing. The internet has empowered startup ventures to seek funding through unexpected sources, bypassing more traditional routes of obtaining venture capital in order to communicate directly with potential buyers or a target audience. So far, crowdfunding has been a success in delivering causes as diverse as movie productions, tech inventions and even healthcare; in the future, further potential may be unlocked and harnessed by innovative businesses.
Although banking has traditionally been a sector unaccustomed to outside disruption when compared to many other industries, it’s become increasingly clear that the future of finance will be shaped by fintech. The question is what shape these disruptions will take, and whether the end results will prove a net benefit to the industry.
Now that the global fintech market has began to boom, startup companies are introducing more and more solutions to the problems and inefficiencies of finance. Payment processing, peer-to-peer transactions, SME financing and other tasks are poised to be improved by the fintech industry. Increased efficiency and reduced cost will lower barriers of entry, which can only serve to improve the finance sector and the economy overall.
The Relationship Between Fintech and Banking
Fintech startups are diverse and eclectic, and not every company has the same relationship with traditional banking and financial organizations.
There are several roles that fintech may fill; some companies act in more than one capacity. Relationships between startups and established financial systems can:
– Serve a customer base that is unattractive or inaccessible to traditional banking, such as offering financial services to rural and developing areas that have previously had little access to banking and investment opportunities.
– Provide solutions to existing problems and inefficiencies in financial services, improving upon older systems and offering innovative alternatives.
– Act as direct competition with financial institutions by offering new but similar services to an existing customer base.
– Build upon and improve banking infrastructure.
– Create disruptive and transformative services and technology that can change the way the finance business operates entirely.
These scenarios are not hypothetical. We have already seen a number of startup projects come to fruition to fill niches and disrupt the status quo. Many of these companies, like KickStarter and PayPal, have grown significantly, becoming household names. They are so commonplace now that it can be easy to forget how truly innovative and disruptive these services are.
Fintech Startups Fill Important Niches
In any industry, the greatest power of a startup is the ability to fill a niche with pinpoint accuracy and precision. Large organizations lack the flexibility to address highly specific needs, and some problems can go unanswered as a result. Startups, especially tech startups, have the potential to uncover these needs and service a customer base that has previously gone unnoticed.
In the world of fintech, this has begun to emerge in surprising ways. Technological banking solutions and improved transaction systems are only the beginning. Startups are beginning to tackle specialty niches within the industry that have long gone underserved.
Insurance is one area getting shaken up by the fintech revolution. Consider Metromile, a pay-per-mile car insurance offering based out of San Francisco, or the team-up of Munich Re and London’s Bought By Many to provide niche insurance products. Real estate, too, is affected. Companies like OpenDoor and Compass are combining real estate offerings with the power of crowdfunding.
Innovative tech companies have also challenged the way we think about investing. Stash, a New York-based smartphone app that puts investing power in the hands of its users, has grown tremendously in a short time. Stash encourages users to invest in ways that are meaningful to them, starting with investments as low as $5 and offering curated portfolios as guidance for newbie investors.
Should Banks Fear Fintech?
Although change is historically slow to reach the financial sector, the big banks are growing anxious about the prospect of competition from fintech startups. A report released by PricewaterhouseCoopers (PWC) shows that more than 80 percent of financial services companies believe their business could lose revenue to fintech competitors.
Fortunately for banking, the disruptive power of fintech comes at the heels of nearly two decades of tech disruption in other sectors. In other words, the banks are not caught unaware: They see the writing on the wall, and they are overwhelmingly moving to embrace these opportunities rather than run from them.
Banks are keenly interested to collaborate with fintech startups, seeking to enjoy the greater innovation and flexibility without the competition. In today’s “innovate or perish” marketplace, embracing disruptive tech is a smart solution for any industry hoping to survive long-term.
However, banking establishments still hold some advantages over their leaner private startup counterparts. In the SME lending market in particular, banks can still offer significantly cheaper and more reliable funds thanks to their taxpayer-insured reserves. Online lenders, funded primarily from hedge fund investments and other such sources, are still pricier in many instances. Similarly, existing banks have deep roots and long-standing relationships with their customers; they do not need to struggle to find their footing in the market. Established brand recognition and a pool of viable customers continues to give traditional banking models an edge.
This is one reason that larger corporations, such as Google and Apple, pose a much greater threat to traditional finance organizations. Where startups can be partnered with, allowing the combined strengths of both groups to merge into something stronger, these tech giants pose a far greater risk of competition to the world’s banks.
How Tech Giants Pose a Greater Threat to Banking
A report released by the World Economic Forum (WEF) suggests that, so far at least, small fintech firms have had little overall effect on the financial sector in terms of competition.
Startups are leaders in innovation, guiding the changes being made to banking and lending, but they so far have not made a major dent in the big banks. Part of this is because fintech services frequently targer markets that have been under-served or ignored by larger banks. Another factor is the cost and difficulty converting existing customers.
A greater risk faced by banking comes from well-known tech giants like Amazon, Google and even Facebook.
At present, financial institutions are falling behind in their capacity to develop tech solutions for data analytics, cloud computing and AI processes. These are areas where the massive tech companies excel, and banks have traditionally been eager to outsource their needs to these corporations rather than invest in home-brewed solutions.
For example, Amazon Web Services currently handles cloud computing for Capital One, Aon and Nasdaq. And both Amazon and Google already have significant involvement in financial services. It’s not a stretch to assume that they can expand to take over the role of the traditional banks they currently serve.
Tech giants have brand recognition and a loyal customer base on their side, posing a real threat to traditional banking’s greatest advantage. They also have the staffing and resources available to focus attention on expanding fully into the financial sector.
If the tech giants do indeed step up to begin offering major competition to the big banks, they will prove to be formidable foes. Startups can be acquired, and partnerships often pose benefits to both parties. It’s highly unlikely, though, that even the biggest banks will be buying out Google any time soon. The tech giants, though, have already begun to invest in fintech startups, acquiring more ammunition for their financial arsenal.
Google especially is in a good place to pursue fintech opportunities. Currently unburdened by the regulatory pressures and legal infrastructure that inhibits banks from exploration and growth, the tech giant is free to experiment. It’s also highly motivated to do so as some of its other revenue sources, like online advertising, are growing less profitable thanks to a savvy market and ad-blocking technology. From that perspective, it seems like an almost foregone conclusion that Google Wallet is just the beginning for the tech company’s foray into finance.
How Can Banks Protect Themselves?
Faced with a rapidly changing tech landscape and pressure from massive corporations, financial institutions must be nimble in their response. Failure to keep up with the shifting tines of innovation will lead them to the same fate as other businesses that were rendered obsolete by disruptive technology. The answer, it seems, is to embrace fintech and adapt to the new financial landscape before competition becomes too fierce.
There has never been a better time for banks to invest in, partner with or acquire fintech startups. Some strategies that banks could employ include:
– Partner with fintech companies to harness the power of online marketplaces and alternative lending.
– Acquire competitors or utilize their existing resources to build home-brew products and solutions.
– Outsource certain tech tasks to smaller firms rather than utilizing larger companies, with an eye toward future acquisition.
This strategy is not without its stumbling blocks. There is a different corporate culture and set of expectations between banks and tech startups. Financial institutions have tended toward tradition and formality, and the easygoing nature of many tech companies could make some partnerships or mergers more difficult to navigate. Additionally, federal requirements for third party oversight mean that banks are liable for their vendors and partners; this may be enough to make some financial institutions balk at freely partnering with new businesses.
Nevertheless, banks have by and large already discovered the power of embracing fintech, and the trend toward innovation is a tide that cannot be stemmed. The sooner banks begin to adapt by fully adopting the disruptive technology and fresh ideas of global fintech startups, the stronger their defense against becoming obsolete in the new financial landscape.
About Mike Baur
Mike Baur is the co-founder and executive chairman at Swiss Startup Factory, a business that works to help startups reach their full potential. He has a keen interest in disruptive technologies and their role in finance thanks to a long history working with both startups and banks.
Born in Switzerland, Baur began working for the Union Bank of Switzerland at age 16 and spent the next decades working his way up, eventually offering investment advice to some of the nation’s wealthiest investors. By 2014, he decided to leave banking and pursue a passion for entrepreneurship, assisting tech startups and helping them get off the ground.
Today, Swiss Startup Factory provides a three-month incubator program that helps startups get off on the right track. The service offers financing, coaching, office space and networking opportunities to promising startups that have the potential to powerfully shake up the market with their disruptive technology and innovative ambitions.