Technology continues to drive change in financial services, whether banks like it or not
Organizations, no matter their size, are increasingly relying on technology to secure their financial future. Financial technology, or fintech for short, is transforming how companies do business by enabling them to borrow, invest, and save online without ever visiting a traditional bank. At the same time, demand for fintech-enabled solutions has never been higher. This has allowed firms that operate in this space to challenge the traditional banking industry’s dominance in B2B payments. With B2B payments, there is now an opportunity for banks to develop solutions that can better serve their corporate customers.
Over the next few years, new laws and regulations will help more fintech firms enter the market and implement financial solutions enabled by greater technology. This transition will also spur changes in the way traditional banks develop and deliver solutions and should encourage innovation in the sector.
As this becomes more of a reality, we will likely see a continued blurring of the line between what’s offered by fintech firms and legacy banks. Technology, especially in this case, is the great equalizer, and businesses are the ones reaping the benefits.
Opportunities for fintech companies
While fintech companies are not banks, many compete directly with traditional financial institutions and exploit opportunities those older institutions ignore. Many banks have responded to this challenge by developing their own technology products, such as an app that allows users to send money instantly to customers of the same bank or work directly with technology companies that offer their own suite of technology products.
Fintech companies rely on technology and customer service, while legacy financial institutions too often remain heavily invested in traditional ways of doing business. Some commercial banks have become more competitive with fintech startups by embedding the latest banking technology trends into their existing infrastructure. This has opened up new opportunities for banks and enabled them to transform their business by replacing the core banking system, which has led to promising growth and additional revenue.
With several traditional banks finally seeing the light regarding how technology can better serve customers, fintech firms continue to cultivate opportunities traditionally overlooked by banks.
Can banks compete?
The traditional financial services sector has a long way to go to become innovative and nimble. Too many banks struggle to keep up with emerging technology designed to provide accessibility, speed, and convenience to consumers and businesses. There has been progress, but it has not been fast enough.
A case in point is the attitude surrounding PPP loans to businesses. Like banks, many fintech solutions, such as Kabbage, Blue Vine, and Funding Circle, were allowed to offer PPP loans to businesses. Some traditional banks were indeed apprehensive at offering loans with relatively low ROI. Still, fintech firms saw the opportunity to initiate interactions with many businesses to cultivate long-term relationships.
But all is not lost for legacy banks, as they have a long history and familiarity with regulations and laws surrounding finance. This may be viewed as an advantage over fintech firms, and in many ways, it is.
Currently, most financial regulation is directed toward traditional banking, but as the world becomes more dependent on digital solutions, banks may find opportunities for their digital banking practices. The same is true of EU banks, where they form strategic partnerships with startups that use their mechanisms. Barclays runs a fintech accelerator program. UBS has launched a competition to find startups to work with, and banks such as Santander, Goldman Sachs, and JPMorgan invest in companies that offer everything from bitcoin to peer-to-peer loans.
There seems to be no appetite for large technology companies to acquire full banking licenses, collect deposits, or lend to their customers in the traditional sense. However, financial institutions such as U.S. Bank have taken the initiative. U.S. Bank may not be active in fintech, but its recently launched SME lending platform aims to take a similar approach to bridge the gap between fintech and traditional lending. To help cultivate relationships and more business, JP Morgan Chase offers a bank chatbot that gives customers greater control over how their financial information is managed. This may not convince tech-savvy businesses to disregard fintech options completely. Still, it’s one of several things legacy financial institutions are doing to shed their reputation as slow and stodgy.
Whether it’s managing commercial banking or cultivating relationships with Millennials who are part of the growing gig economy, technology-driven finance is the future. Fintech startups offer the ability to operate at much lower costs than traditional financial-services firms, giving them an advantage over traditional banking and securing their place in the future of the financial industry – at least for businesses. But banks are aware of the divide and are looking for ways to bridge it.
Fintech is still evolving, and the offerings we see today may be somewhat different 24 months from now. Many traditional banks, and their business customers, are not yet fully aware of how newer technology will impact their daily operations in the coming years. But, as fintech companies take the initiative, the real power lies in how underlying technology, such as artificial intelligence, distributed blockchain databases, and their applications, can and will transform financial services.
Ernie Martin is Founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. He previously chaired the Vendor Forum of the Federal Reserve Bank of Minneapolis and his resume includes time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific, as well as a number of years as an independent consultant.