Go backGo back

Features

Where is the future of fintech headed?

Banks shifting their fintech focus

The fintech space is booming and as finance and technology converge further, investors will continue to pour billions into new innovations that deliver services more efficiently. Typically, the big banks have been major players in terms of providing financial backing to promising start-ups, supporting them through incubator functions, and even just buying them outright.

However, with traditional banks being forced to spend more on upgrading their outdated systems, the FT has reported a change in the way banks invest in fintech firms. Increasingly they’re making fewer but larger investments, favouring partnerships over acquiring majority stakes.

As banks such as RBS now focus their attention on developing their own digital offerings, an open question remains as to whether fintech will unseat the big players in finance, or if the legacy firms will be home to where most of the successful fintech innovation actually happens?

All banks have seriously considered buying a fast-growing challenger, but they have created similar offerings themselves. This has worked out cheaper, but the question is, are they better?

Rav HayerHead of UK fintechs, PwC

Big tech meets finance

Much has been made of the potential threat to banks posed by the big technology firms. From Apple launching its own credit card, to Facebook’s proposed digital currency Libra, there has been plenty of noise in the space. Silicon Valley’s foray into financial services has however, so far been relatively gradual.

Google has said it plans to work with existing financial services providers, such as Citigroup to drive greater adoption of Google Pay. For now at least it seems the strategy is not to disrupt or replace banks as such, but to act as partners. While banks in the US and Europe may not yet have felt the full force of disruption from the big tech players, in China and across south-east Asia it’s a very different story.

According to John Thornhill, the FT’s innovation editor, “technology is completely redesigning finance in China from the smartphone user’s perspective.” The use of mobile payments is fifty times greater in China than the US and this staggering growth has largely been facilitated by two tech giants, Alibaba and Tencent, who have benefitted from powerful network effects. To put their growth in perspective, since being founded in 2014, Alibaba’s financial arm Ant Financial is today worth roughly fifty percent more than Goldman Sachs.

Although the overseas expansion of China’s major tech players has been slow and hampered by regulatory hurdles, Jan Metzger, Asia Pacific head of banking, capital markets and advisory at Citi highlights the need for incumbent banks to be weary of the threat they pose.

This is a revolution for the whole world. Asia is 12 years ahead. It is a time machine to the world.

Jan MetzgerAsia Pacific head of banking, capital markets and advisory, Citi

An end to the dominance of established lenders?

If Asia is to be a ‘time machine’ for the west as far as digital banking is concerned, the biggest task will be to persuade consumers to switch from tried and trusted banks to an app. The UK is often cited as an example of where digital entrants have had success, however the likes of Monzo and Starling are largely regarded as useful for specific purposes, such as commission-free spending abroad.

FT retail banking correspondent Nicholas Megaw has reported on the struggles of the early banking “challengers” such as Metro Bank, highlighting the difficulty of breaking the dominance of the UK’s big four lenders.

In markets such as India and China, digital entrants have been aided by “decades of aloof, inefficient and expensive service from traditional banks and other financial institutions” and even smaller start-ups are capturing significant market share. The message for traditional financial institutions in Asia is clear: adapt now or risk becoming irrelevant.

Ultimately, whether banks in Europe and the US are subjected to similar levels of disruption is difficult to predict, however as John Thornhill notes, China’s “late-mover advantage” makes its tech giants the leaders in the race to capture those consumers without a bank at all.

About 1.7bn people in the world remain unbanked. When they come online they will be looking for cheap, convenient, integrated digital financial services, such as China has pioneered. China has the chance to rewire 21st-century finance.

John ThornhillFT innovation editor

Plug-in to authoritative market insight

The world of fintech is vast, but through the FT’s international network of journalists, fintech professionals and those involved with the sector have a view on emerging themes and developments on a global scale.

High-quality market intelligence should be a mainstay of any organisation’s strategic planning and over 8,000 companies are already using an FT Group Subscription to learn about what their competitors and peers are doing in other parts of the world, how their potential investors and clients are thinking about the landscape, and how regulation is evolving.

Our belief is that all members of an organisation need an awareness of the context in which they’re working and the impact their technology is having.

Richard WatersFT West Coast editor

An FT Group Subscription extracts the intelligence that’s relevant to your business and delivers it via the media and technologies that suit you best, saving you time and keeping you informed on what matters.

Sign up today for an instant 30-day trial and see how our award-winning journalism, from 600 journalists across the globe, can help you and your team make informed decisions and reach your goals faster.

You might also like

Join our mailing list

Please fill in the form below to receive the latest updates.