What can Traditional Banking Learn from Fintech?

The way financial products and services are consumed, created, and disseminated has changed as a result of technological advancements. New industries, such as Fintech firms, are pushing innovation in this market, while conventional institutions, such as retail and investment banks, microfinance institutions, insurance companies, and others, must adapt to avoid being replaced. 

What are the problems, and what is the best route forward? Fintechs are firms that provide financial goods and services using technology and digital innovation in their business practices. The sector includes industry behemoths such as Google, Amazon, Apple, Vodafone, and Alibaba, as well as more recently formed firms that operate in specific financial business niches such as payments and transfers (AliPay, Vemmo), loans (Kabbage), investments (Nutmeg) and payment processing (Adyen).

Investments in the Fintech Industry!

According to a Citigroup analysis, private investment in this industry worldwide grew at an exponential rate between 2013 and 2016, hitting a record of 20.9 billion dollars in 2016, 16 billion more than in 2013. Because of the widespread usage of mobile phones throughout Latin America and the Caribbean, as well as the enormous number of people who are unbanked or ignored by banks, the area is proving to be a fruitful ground for the growth of the Fintech business. 

According to the Latin American Venture Capital Association (LAVCA), the sector received 40% of the total amount invested in information technology and telecommunications by Latin American and foreign private equity funds during the first half of 2016, compared to 29% during the same period last year. Nubank, Electronic Market, Afluenta, Moneyme, GuiaBolso, and BankFacil are just a handful of the companies that have piqued Silicon Valley investors' interest. 

According to the World Bank, Mexico is emerging as the most important regional hub of Fintech innovation in Latin America, followed by Brazil, Colombia, and Chile.

7 Reasons to Collaborate with Fintech!

To avoid being supplanted by Fintech, conventional financial institutions must offer better goods and services that are more tailored and disseminated via digital channels, particularly mobile.

1. Efficient Innovations!

It is more efficient to innovate by incorporating ideas from other countries and collaborating with other companies, especially in industries such as finance, where the pace of technological change is rapid and independent entrepreneurs can produce innovations that are on par with or better than those produced by large corporations. 

This practice is known as open innovation. Many significant financial institutions, such as Citibank, Bank of America, Wells Fargo, Santander, Barclays, Capital One, and BBVA, have learned that they can partner with Fintech businesses rather than compete with them, and that open innovation may help them achieve a variety of goals.

2. Shorten the duration of your learning curve!

Working with Fintech firms, banks are obtaining a deeper knowledge of businesses that are fundamentally different from those they have been running for years in a much shorter period of time.

3. Attract employees that have the ability to alter the game!

Banking on Fintech innovations allows banks to make use of existing expertise while also investing in educating the human resources needed in areas such as data analysis, artificial intelligence, design, cyber security, blockchain, and other new technologies.

4. Increase the organization's inventive and collaborative culture!

Working with Fintech helps to improve a bank's organizational culture by encouraging cooperation, experimentation, taking risks, and agility in concept execution.

5. Reduce the costs and hazards of bringing our own technologies to market!

Going to market with Fintech solutions that have already been verified by the market or that can be validated rapidly in collaboration with banks is less expensive and hazardous than testing your own inventions.

6. In a timely way, identify and assess new financial and non-financial company opportunities!

Incubators and accelerators, as well as contests and hackathons, are all strategies used by banks to discover startups and breakthroughs in new verticals and markets.

7. Utilize the company's exclusive technology in a number of ways! 

Separate organizations or other formats can be used to license or commercialize technology developed by banks on their own or in collaboration with Fintech firms.

In a number of methods, previously listed banks and other financial organizations have incorporated their former competitors into the value chain and business strategy. Other financial institutions, such as BBVA, are creating their own ecosystems in which Fintech companies and others are linked through platform-type business models.

Impact of Governments of this Industry!

Governments will have a huge effect on the future growth of the financial industry. One of the most important issues is figuring out how to allow for Fintech innovation while also safeguarding customers' interests and sustaining the financial system's integrity. Collaboration with the Fintech sector may help banks and other financial institutions modernize their operations; however, appropriate legislation, as in the European Union and the United Kingdom, must be in place to support this collaboration. 

Regulations can also aid in the promotion of financial inclusion, which has a large positive influence on the economic growth of many developing countries, particularly in economically disadvantaged areas. Banks, microfinance institutions, and other small and medium-sized financial institutions should follow the big banks' lead and collaborate with Fintech companies. But they are hesitant to do so due to the operational, legal, regulatory, and reputational risks associated with collaborating with companies they are unfamiliar with and using technologies and providers they do not understand.

One contributing factor to the problem is that they have not yet established the capability to study existing solutions and determine how specific Fintechs can improve their product offerings and operational efficiency. When compared to the cost of being displaced by Fintech companies, learning to collaborate with them is a cheap investment. The longer they wait to act, the more difficult it will be for them to compete in the quickly expanding new financial landscape of the digital era.