Just a decade ago it would’ve been hard to imagine paying bills with bitcoin or taking investment tips from a ‘robo-adviser’. Now such services are commonplace in the global financial marketplace. Ever-advancing technology, combined with millennial clients more willing to embrace digital data, has led to a boom in Financial Technology, or FinTech.
In 2015 global investment in FinTech reached US$22.3bn. While the industry first made inroads in just a few basic services, it has now diversified to take a foothold in almost all aspects of financial services, from banking and corporate finance to trading and SME lending.
“FinTech emerged post financial crisis and started off initially in four areas: lending, payments, blockchain and wealth management,” says Ray Ruga, Founder of FinTech Americas. “This crop of young, start-up companies started offering these financial products that were very fast and very user-friendly. The banks, who were recovering from the crisis, were behind the curve and started losing a lot of business. Banks used to have no idea what FinTech was but today most know it is happening because competitors are coming into the marketplace and banks are getting squeezed.”
DEVELOPING A FINTECH STRATEGY
Media technology entrepreneur Ruga works with banks throughout the US, Latin America and the Caribbean to help them become more technologically savvy. He says Caribbean banks have a steep learning curve when it comes to FinTech but there is a growing awareness in the region about how the industry should respond and some institutions have begun to lead the way. “From what we have seen there are leaders in the Caribbean,” he says. “Banks are beginning to figure it out. They are looking for ways on how they are going to become more efficient and responsive. Some Caribbean banks have made changes and are beginning to address it but they all have a way to go.”
Ruga points to the National Commercial Bank of Jamaica, which launched its mobile banking e-platform last year, as a pacesetter in the region, and adds that several banks in the Dominican Republic have also developed solid FinTech strategies.
Mapping out a strategy is crucial, according to Ruga who says it is a good first step for banks who are hesitant to dive into such a complex and rapidly-changing environment. “There is a fair amount of awareness but a lot of banks are stuck on where to go from here,” he says and recommends that financial institutions work first on appointing a multi-disciplinary team to lead the FinTech strategy with the support of management. Adopting a forward-looking FinTech approach sometimes requires a shift in the bank’s culture, according to Ruga, and this can only be achieved if all stakeholders are onboard. Once the team is in place, banks should then carry out an appraisal of their strengths and weaknesses, identifying areas where they are performing well, and those that could be improved. Ruga says: “Start with an easy win. Pick something critical to your bank’s mission and then try to simplify it. Each Caribbean country will be different but banks need to look at their position in the market and what they are good at. Start small and learn what is out there and what has worked. Look at examples of best practice.”
Unfortunately, banks don’t have the luxury of time when it comes to developing their FinTech roadmap. With new technologies being developed constantly, financial institutions are left playing catch-up in an ever-evolving environment – an environment where the cards are stacked against them.
Being subject to a heavy burden of regulation, banks cannot be as nimble as FinTech companies, nor are they as willing to innovate. Wary of falling foul of regulators, banks are cautious and slow, hanging back where FinTech start-ups are diving in. Ruga says: “A lot of banks do not want to make aggressive technology moves unless the regulators allow it. The regulatory process is bottlenecking a lot of the process of innovation, which is the way it has to be – it has to be done in a safe way.”
With an increasing amount of sensitive financial information being stored online, it’s no wonder safety is a top concern, not just for banks but for everyone involved in the sector. As Ruga points out, however, security has always been at the forefront of banking. “Security is a huge risk, there’s no question about that. It is an area of major focus for industry, for government, for everyone. Banks have always had to continuously improve their security, whether physical or digital; that is not going to stop.”
COLLABORATING, NOT COMPETING
Traditional banking may be undergoing a serious facelift to wrestle business back from FinTech firms, but it is far from obsolete. “Banks have two major advantages: trust and the cost of capital,” says Ruga. “The cost of capital is very expensive and customer acqusition is very expensive. Banks have these inherent operational advantages. FinTechs are finding that scaling their operations to bank size is very hard and very expensive.”
As FinTechs grab more market share they are also catching the attention of regulators and soon will face just as heavy a regulatory burden as the banks but without the operational structure to shoulder it. This will level the playing field, and attitudes among FinTechs have already started to shift in response. Ruga, who works with both banks and FinTech companies, says the relationship between the two is now softening and becoming less adversarial.
“FinTech companies do not want to compete with the banks; they want there to be more collaboration [and] banks are beginning to view them as potential collaborators as well. I like to say they are going to become ‘frenemies’.”
As banks and FinTechs move towards a collaborative approach, customers can expect the best of both. Ruga says: “A lot of FinTech is moving to the back office and that allows banks to mimic the user experience and speed of a FinTech company. We are seeing more solutions for banks that are inspired by FinTech capabilities. A lot of the investment and focus now is going away from what people see to the way in which banks operate and are structured. A lot of the major work is behind the scenes.”
With the latest technology at their fingertips, banks will have ever more creative solutions at their disposal. The emergence of blockchain, artificial intelligence, innovation in document storage and regulatory technology (‘RegTech’) – all are poised to transform the banking industry.
For those banks who do not get onboard with the changes, Ruga has a word of warning: “Major players are going to emerge and set the pace for the rest of the pack. If the others do not adapt, their viability is going to be strongly in question going forward.”