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THE DIGITAL DIVIDE: HOW BANK CEOS CAN TAKE ADVANTAGE OF FINTECH DISRUPTION

Technology has reshaped every aspect of our personal and business lives. From the way we work to the way we shop all the way to the manner in which we bank, digitization is well under way and influencing virtually every sector of the American and global economies.

The Rise of Fintech

Perhaps no other industry faces this wave of digital disruption more than financial services, which is inclusive of banking, insurance, investment and a broad range of other businesses that manage money and consumer finances. The doomsday scenario headlines frequently appear, predicting the new breed of technology-driven companies that will send banks into oblivion. Built at the convergence of financial services and technology, known as Fintech, these new players represent both an industry and paradigm shift to approaching business intelligence, risk management, regulation, payments processing, and lending.

The fact that Fintech companies are a threat to banks’ market share is somewhat ironic because the financial services industry has been a big IT spender for some time now. Computer Economics reported in its annual IT Spending and Staffing Benchmarks study, that in 2015 alone, the financial services industry increased its IT spend by 5.5%, well above the median average of 3%.  Separate metrics provided by IDC show that total IT spending for the global financial services market reached a staggering $458.4 billion in 2015. This figure is projected to top $522 billion in 2018. Apparently, finance CEOs think about technology and its vital role in fueling an increasingly consumer-driven industry.

While one can argue about the extent of the impact of the digital disruption on current financial service providers, the transition appears to be happening with or without them. Consider the rapid rise of mobile payments as an example. The confluence of consumer demand increased mobile device adoption and high NFC penetration at point-of-sales stations has created a multi-billion-dollar market for small payments processing that is being filled not by banks, but by technology giants like Apple and Google. These innovations create a form of disintermediation in the market that threatens to leave banks out in the cold.

Also, consider that blockchain technology is leveraged by multinational corporations and national governments, not to mention the hundreds of thousands of merchants that accept cryptocurrency as a form of payment. It is just one example of a technology that many in the financial world refuse to embrace, despite its potential in addressing security challenges, tracking payment history, and reducing the risk of defaults.

Another financial business model being reshaped by digital disruption is wealth management and day-trading. Estimates show that there are more than 4 million retail forex traders around the world, many of whom trade on the major markets using online brokers and digital platforms like MetaTrader4. Consumers and investment firms increasingly rely on robo-advisors, which provide algorithm-based portfolio management solutions without the use of human financial planners. Wealth management giants, like BlackRock, have wasted little time acquiring these service providers, signaling that automated systems are quickly becoming a permanent fixture in the investing world.

Against this backdrop, decision-makers are looking for answers and solutions on how to bridge the digital divide. Amid growing competition from traditional and emerging financial players, navigating (and monetizing on) the Fintech ecosystem has never been more crucial for financial service providers. For starters, investment in FinTech ventures more than tripled between 2013 and 2014 to reach $12.21 billion, with $2 billion of that concentrated in the start-up ecosystem of Silicon Valley. Fintech-related investment is expected to grow exponentially in the foreseeable future as venture capitalists, tech companies, and financial services providers themselves look to tap into this booming industry.

How To Bridge The Digital Divide

It seems that the Fintech vs. banks relationship is now entering its third stage. During the early days of the Fintech revolution,  Fintech companies claimed they will make banks obsolete. What has often been overlooked, however, is how many of the advances in Fintech rely on the established financial service infrastructure to succeed. Enter, the stage of partnerships marked notoriously by significant agreements between established banks and the newcomers, like ApplePay and PayPal to name a few. But now, the realization is slowly settling in that it’s the financial services providers operating in the banking, investment and insurance industries that are best positioned to capitalize on the evolving FintTech ecosystem.

CEOs looking to bridge the digital divide must be willing to adapt, invest and innovate. These three themes are critical for existing institutions to benefit from the growth multipliers that Fintech services offer. By adopting these ideas, they will be able to deploy new technologies and services quicker and more efficiently.

Adapt: The major trends in FinTech disruption clearly show that financial technology extends far beyond digital banking. Some of these trends emanated from non-banking domains, which makes adapting to them a challenge for current players. First and foremost, banks CEOs no longer have to believe they are “under attack” from disruptive start-ups and early adopters. This change alone will help to look for growth opportunities beyond the disruption threats.
Invest: Big banks are already shifting their Fintech strategy. They actively invest in startups that challenge the most crucial lines of business in the financial sector.  To capitalize on Fintech, CEOs must enhance organizational capacity by the willingness to invest in disruptive technologies.
Innovate: To get there will require a bit of imagination and a lot of practical solutions for overcoming barriers to adoption. Holistic approach – from soliciting ideas from your own employee base to changes in hiring methods, establishing a customer-centric operating framework and  genuine commitment from top management – is what will help move the needle. The concept of Innovation Labs prevalent in tech companies can be replicated in banks with the labs given freedom to create and test prototypes of innovative solutions in the market.

FintTech’s expanding horizon shows no signs of abating as banks and other financial service providers look to meet the demand of tech-savvy consumers. Internally, business processes are increasingly driven by automated risk management software, agile regulatory technology, and predictive analytics driven by big data.  The good news is banks don’t have to be the first movers in the FintTech market to reap its benefits. They just need to be able to reimagine their business and view disruptive technology not as a risk, but as an enabler.


Are you a bank executive? Should you ignore, acquire, partner or compete with the new technology-driven competitors?  Join our 5-day Silicon Valley Immersion Program “Navigating FinTech Disruption” to get the first-hand insight into the FinTech landscape and get clarity on how to leverage the FinTech disruption to your advantage. Learn more about this unique chance to connect with the top innovators and practitioners shaping the future of banking.

Fintech Disruption

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