The World Economic Forum has just completed one of the most thoroughgoing studies into the effect of fintech on the financial services industry. Although ‘Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services’ isn’t the most imaginative title, the study contains over 150 interviews and accounts of ten international workshop sessions. The objective was to encourage collaborative dialogue to discuss insights and opportunities concerning fintech disruption within FS.
If you haven’t seen it, then I suggest you take a look as it provides an excellent summary of where fintech is right now and the specific threats and opportunities facing the banking and payment industries. For me, a few key points stood out:
How fintech has changed the industry
- Many fintechs came into being with the aim of overtaking the incumbents and becoming the new dominant players in financial services, but have shifted to building partnerships with them as they struggle with scale and customer adoption.
- Fintechs have seized the initiative – defining the direction, shape and pace of innovation across almost every subsector of financial services. They have succeeded as both stand?alone businesses and crucial parts of financial value chains.
- Fintechs have reshaped customer expectations, setting new and higher bars for user experience. Through innovations like rapid loan adjudication, fintechs have shown that the customer experience standard set by large technology firms such as Apple and Google can be met in financial services.
- The willingness of customers to switch their allegiance from the incumbents has been overestimated. It is a costly process, and the innovations which might entice them are often insufficient to make the move worthwhile, especially as the incumbents themselves adapt and develop.
- Fintechs have struggled to create new infrastructure and establish new financial services ecosystems, such as alternative payment rails or capital markets. They have been much more successful in making improvements within traditional ecosystems and infrastructure.
- The overall conclusion is that fintechs have materially changed the basis of competition in financial services, but have not yet changed the competitive landscape.
The report runs to nearly 200 pages, but when you read it you get the sense that while fintech companies have not yet been able to revolutionise the competitive landscape, they have laid the foundations for major change in the future.
Implications for banks and payments companies
These foundations present new and big challenges to the large institutions. One of fintech’s successes is to change the pace of technological advancement. The dynamics of our industry are changing at a speed few organisations have experienced, and for this reason I believe that one of the critical requirements for success faced by all large organisations will be the ability to manage development more rapidly. The challenge will take different forms:
- the ability to create and develop technology, then speedily deploy it.
- the ability to research and form partnerships with new service providers, and then deploy new propositions at pace.
Agility will be something discussed more frequently. I see too many projects delayed and running over budget because the skills, resources and technological capacity required to develop and implement them remain woefully inadequate. A growing list of companies have changed the way they work and recognised that agility will be critical. We all know of other industries that have failed to adapt to technological change and been slow to react. Think of Kodak, Atari and Nokia. But what does it take in financial services to become more agile?
Barriers to innovation
There are many barriers to innovation in banks and payment companies, but the main ones can be summarised as follows:
- A lack of detailed documentation – over the years, an accumulation of functionality changes which have never been fully documented. The company’s work has involved customised and patched software amendments. The technology has become layered but all the inbuilt interdependencies are something of a black hole. Increasing demand reduces the time available for good record keeping, resulting in a fragile system.
- The layers of legacy technology – creating a fragile environment which resembles a house of cards. This is compounded by how difficult it is to regression test the impact of minor changes on a system, and given the nature of the changes that are driving the market this is a major barrier for many.
- A lack of expertise – along with a lack of documentation there are problems with experience of the IT systems. Some companies suffer as people move on to other organisations and their detailed knowledge of the systems leaves with them. At the other end of the spectrum, some organisations find themselves totally reliant on a small group of experts, which slows deployment.
- A lack of technology – when testing and deployment is done manually. Manual processes are hard to scale, since throwing people at a problem typically adds confusion, cost, inefficiency and management overheads.
The result is that people become fearful of making changes as no-one can speak with total confidence about their effect. Those who can are limited by time so bottlenecks occur. How can you migrate to a new system or link to new technology under those circumstances?
Being successful in the fintech age
Making the right decisions on where to invest your IT budget will clearly be vital to success. But if you make the right decisions on how your company will develop, then your ability to deliver will become critical. The quickest way to remove the aforementioned barriers is to automate the test process. Automation eliminates waste and enables multiple teams across the world to test concurrently, and all the changes are stored, which removes the chance of future problems caused by insufficient documentation.
By contrast, manual approaches are clearly outmoded and out of step with the drive to digitalise, and more importantly they impede an organisation’s ability to keep pace with new competitors and the increasingly exacting demands of customers.
If you want to know more about all this, you can read the Finextra white paper which covers the topic in detail. It can be found here.
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