Wallstreet: Fight or Flight?
A short analysis on the FinTech Industry’s impact on the Big Banks
$70 billion — that is just the tip of the iceberg.
The six largest US financial institutions are projected to spend $70 billion annually just for regulatory and compliance measures while fintech instruments are implemented into consumer and wholesale financial products and services.
Since the turmoil of 2008, customers have demanded a greater level of transparency, efficiency, and capability with their banking needs. In the past three years, this responsibility that has fallen into the hands of financial institutions has been answered through fintech mechanisms and startups. But why is the answer Fintech?
Enter: FinTech
FinTech (aka financial technology), covers a broad umbrella of categories and services. From data storage alternatives, cybersecurity enhancements, payment securitization, and a plethora of technology-driven solutions, financial institutions turn to these innovations as a solution to their customers’ transparency demands. Fintech innovations can be implemented in all departments of banks from back to the front end, customer service desks, and even messaging platforms. Startup initiatives, therefore, are heavily diversified offering a niche unforeseen service. Initiatives again vary immensely but waterfall into a pool of solutions for banks: better branding, better service, cheaper prices. Products produced by fintech companies often take a labor-intensive task and automate it, reducing the need for a large workforce, i.e. cutting costs. Products are able to analyze market trends and consumer insights and place ads on heavily trafficked websites, capturing a larger pool of customers, i.e. better branding.
Due to the fact that fintech products are not only diversified but very niche, this often means only a small banking issue is fixed. As a result, financial institutions are constantly analyzing up-and-coming fintech companies that offer a new service that can pair with company pre-owned fintech implementations. For high levels of banking efficiency, it is critical that the front to back end software is compatible, so a large amount of time, money, and effort is being invested in the research and due diligence of fintech compatibility. Back-end mechanisms consist of the architecture and infrastructure that banks use to interact and transact with one another, such as payment and messaging systems. But does fintech always have the upper hand?
While these new ideations are paving roads to success at unprecedented rates they do not independently hold the reins. Fintech applications and services such as Venmo payments, SoFi loan capabilities, or Betterment investments, all use the same legacy infrastructure large banks utilize. Fintech companies are dragged through muddy waters and pay a fortune to conduct transactions with such efficiency and, therefore, will not be leaders in the space until an alternative is found, giving banks a chance to respond.
Traditional Big Banks themselves, however, don’t possess too many options to respond to the competitive innovations from start-ups and large firms in the FinTech industry which are disrupting their services. These institutions can either:
- Do nothing and slowly decline into obsolescence, which is ultimately very expensive.
- Acquire a FinTech — this is potentially fast, but still very expensive as many FinTechs have an upper hand in their adaptability and understand their market advantages.
- Copy or mimic FinTech innovations — this process is usually slow and very expensive. Much of the IT architecture in large companies are older and more expensive to upgrade, especially as tech continues to change and advance over time.)
- Partner with a FinTech (cheapest and fastest)
A majority of the time, Big Banks will choose option 4.
In the fight or flight scenario, however, the success of financial institutions is obvious. As consumers understand these simpler fintech methodologies and financial literacy rates increase, financial institutions' market presence will diminish. Financial companies must adapt, pivot, and get on board with fintech companies or else they will be a service of the past.
Sources:
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Written by: Stephen Jiminez, Third-year at Northeastern University pursuing an International Business degree with a double concentration in Finance & Fintech and a minor in Data Science. Linkedin: https://www.linkedin.com/in/stephen-jimenez-68535a197/
