There really is no overstating just how operationally
different a fintech company is to a traditional, established, financial
services organisation.
Fintechs are digitally native companies – they’re born on
the cloud – and this imparts a high degree of agility into their DNA. It makes
them capable of analysing customer data in creative ways and offer new,
personalised services that cut right to the heart of their user’s challenges.
One could even change its entire business model overnight,
and the biggest impact to its customers would be a software update and new
terms of agreement that would be so seamless an experience, they would probably
go unnoticed.
For traditional financial services vendors – many of which
have been around for centuries – this hyper-agile mindset runs counter to their
DNA. Nor was it the mindset that regulators had when many of our established
financial institutions, such as banks or insurance providers, were created long
ago. And this is why many fintech companies operate along different regulatory
guidelines, some not even requiring a banking license.
Technology has fundamentally changed our collective approach
as to what is required from a financial services institution, and it’s not how
these large institutions were geared to work, which is why they’re losing
market share to these ‘new kids on the block’.
However, there are other advantages that come with being an
established financial services institution: capital and resource. Traditional
firms have three key ways that they can combat the rising tide of challenger
start-ups popping up – compete, support or acquire – and in this piece, I will
consider the merits of each.
Compete: old school vs new school
For a long time, competing with fintechs not only seemed
like the obvious option, but also the easiest. Afterall, traditional vendors
had a significant head start on their new, digital competitors. Even without
all their technology, they had the customer base and – perhaps most importantly
– an established reputation.
However, time quickly revealed that being customer-led the
way these challenger fintechs were able to be was too powerful a motivator to
ignore, and large organisations realised they had to compete more directly.
But when you’ve been doing things a certain way for so long,
it can be hard to muster the change needed internally. That’s why some
organisations resort to creating separate teams, divisions, or entirely new
fintech businesses of their own to gain new technology-fuelled capabilities
such as DevOps or cloud services.
The hope is these new agile features will filter into the
operations of the larger establishment, making it more attractive and
competitive to customers in the modern financial services arena.
Support: if you can’t beat them, join them
The hierarchies, red tape, technical and organisational debt
(legacy technology and old, redundant processes that slow down innovation) and
others are features of large, established organisations that aren’t exactly
easy to shake off. They bleed into every corner of a business’ operations and
are antithetical to what gives a fintechs its magic – agility and technological
innovation.
That’s why many of these large organisations find it’s not
enough to just create a team or division within their business. Sometimes, they
feel they need to take themselves as far out of the growth process as possible
and instead support a new, separate, fintech’s growth as opposed to creating
one themselves.
Often, they’ll take a stake in a fintech startup early on
and provide it with an incubation hub for its initial stages of development,
feeding it with funds and resources until it’s ready to take on the world.
Not only does it free the burgeoning fintech from the sticky
nature of its larger benefactor, but it reduces the direct risk – financially
and reputationally – for the established organisation.
Acquire: if you can’t beat them, buy them!
When a large financial services business feels like
competing is too arduous and supporting a new fintech will take too long, often
they have the resources necessary to simply buy a fintech startup that has
already gone through the early stages of development and is already showing
financial promise.
As you can imagine, this is the most expensive option of the
three, but it’s also the least risky. The business knows what it’s getting and
can start recouping its investment almost immediately.
However, the large businesses often don’t just pick one
option – they diversify their approach with a mixture of all three. They begin
incorporating more digital tools to placate their existing customers’ growing
needs, support a nest of burgeoning fintechs and acquire other more established
fintech businesses, or small digital businesses, to give it new capabilities.
Change starts internally
Whichever direction large financial service businesses
decide to go, it’s crucial they first begin the hard work of shifting the
existing internal mindset. Many are so stuck in their ways that whatever option
they go for, it will still be hard for them to adapt. So, they need to be open
to change and learn from the fintechs they get involved with if they want to
have a chance of that agility rubbing off on them.
On this front, the Covid-19 pandemic has been an incredible
catalyst for change in many large organisations. It has forced them to adopt
new technologies and work practices simply to stay operational, and it has
already had an impact on many of these firms.
By hanging on to this mindset and continuing to foster
cultures that value adaptability, agility and change, it will make them more
likely to succeed, however they end up entering the fintech arena.
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