Banking tends to have a reputation for adopting new technologies slowly and cautiously, but an emerging breed of financial technology or “FinTech” companies are aiming to disrupt the global banking industry, and a new report says banks are partnering with FinTechs in order to stay relevant, by adding creativity and entrepreneurial spirit to their operations.
In its latest report on the Canadian banking industry [PDF], PricewaterhouseCoopers’ analysts found that Canadian banks are investing in FinTech as a way to make sure they are building technology for the future of the industry.
“[M]any banks are making heavy investments in technology as they continue to transform their customer experience, automate processes, comply with regulatory demands and enhance digital capabilities,” the report states.
Innovation is needed for immediate and long-term challenges in the industry
In the short term, FinTech could help banks navigate the year ahead, which will bring with it economic challenges similar to a 2015 that was characterized by dismal commodity prices, weak economic growth, and unemployment.
In the longer term, Gen X and Millennials will assume a more significant role in the global economy over the next decade and traditional industries like banking will have to adapt to their attitudes, behaviour and expectations, the report said.
“As the FinTech-driven movement gains momentum, Canada’s banks are monitoring the evolution of this emerging ecosystem and actively pursuing opportunities to play an integral part in it,” the authors of the PwC report wrote. “Banks recognize that they have much to gain from FinTechs’ innovations: soon, many FinTech driven offerings may become pivotal elements in banks’ operating models, enabling banks to reduce costs, reach underserved markets and open up new products and revenue streams.”
That’s not to say that large companies outside traditional banking haven’t also been involved in disrupting the industry. Apple launched its mobile payment platform Apple Pay, which although weak in Canada, has achieved broader use in the US, UK and China. Google has also registered as a mortgage loan broker and provides mortgage search capabilities in the UK and some US states, though this effort too has been less successful in Canada than elsewhere.
There’s no shortage of challenges for FinTech startups either. Winning the trust of Canadian banking customers is a significant barrier for all new entrants into banking. There’s also the fact that the vast majority of startups fail – meaning they might not have much time to gain consumer trust. And it’s also difficult for FinTechs to compete with Canada’s competitive banking sector, which is not only investing in technology but also has the advantages of economies of scale, resources, expertise and brand recognition.
This creates a compelling case for Canadian banks to partner with FinTech startups to reimagine operating models, streamline costs, reach new markets, develop new products, and open new revenue streams.
The FinTech startup advantages: venture funding; customer focus; nimbleness
The FinTechs that survive their first shaky steps to stability are well funded and relentlessly focused on delivering customer-centric solutions with innovative, inexpensive and simpler offerings. Given their relatively small size, they’re also unencumbered by large, existing businesses and costly infrastructure, making them more nimble. This lets FinTechs more easily use the latest cloud and open-source technologies, big data and analytics, and greenfield infrastructure.
The degree of competition perceived between FinTech and traditional banks could also be overblown. FinTech companies providing financial services that compete directly with banks are only one segment of FinTech. Many FinTech startups are aimed at providing technology solutions to financial institutions or improving user experiences on top of incumbent financial services. FinTech companies under these models can be viewed as enablers to traditional innovation and continuous improvement.
The new clashes with (and complements) the old
Canada has more than 80 FinTech firms, most of them in the GTA-Waterloo and Vancouver areas, according to the report. Many embrace a talent mix that includes creative Millennials and experienced financial talent, which is a dynamic that PwC noted is complementary.
However, investment in Canada’s FinTech ecosystem, which currently stands at $1 billion since 2010, needs to grow, especially since nearly $16 billion was invested globally in 2014 alone. In recent years, pension plans have been among the most significant investors in Canadian FinTech, but PwC notes more investment from government and private investors, and banks themselves, is needed.
Regulation is also an issue, given that market innovation can be stifled by regulators aiming to preserve economic stability. The report notes that some FinTech companies find themselves outside the reach of certain regulators, but they may eventually become integrated into Canada’s banking system and regulatory scheme.
Still, FinTech startups are able to adopt new thinking and bring concepts to market, according to the PwC report, and “in the end, these efforts will help build a Canadian FinTech ecosystem whose members are able to take on global competitors—and win.”