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Amit Mehra, Banking Client Partner, Cloud Transformation, TCS ANZ, answers the burning questions on the disruption of fintech in financial services.
Posted: March 2021
Technology has revolutionised the financial services industry. Fintech has smashed preconceived ideas and ways of working, challenging the entire industry to adapt, evolve and create new services and solutions, says Amit Mehra, CBA Client Partner, TCS ANZ.
Since fintech companies have arrived on the scene, traditional banks have come under considerable pressure to evolve and contemplate the future of banking. Those who are waiting for a ‘blockbuster’ type moment for the big banks won't be seeing it anytime soon. These financial services companies have the foundation that includes brand capital, cash, funding models, and an appetite to adapt quickly.
It's not surprising that the industry invested over AUD 630 billion (USD 500 billion) in fintech in the last ten years alone as the target market is quite lucrative, with the Financial Services Industry currently worth AUD 31 trillion (USD 25 trillion globally). Fintech market value is predicted to grow to AUD 391 billion (USD 310 billion by 2022), with space for hundreds of successful fintech companies to launch into this sector.
How has the Australian banking industry responded to the fintech revolution?
We haven't seen a standard approach to fintech from the big banks, likely due to the technology's diverse nature (from ATM’s to neo banks) and types of startups in the market. From in-house incubators to partnerships, including Barclays Accelerator and CBA's X15 Ventures, a white labelling approach, acquisition and digital platforms' internal development (JPMorgan Chase launching a digital bank in the UK), the response has been mostly defensive until now. However, there are banks such as Capital One that are embracing change and taking an assertive approach.
Australian banks have invested in more than 50 fintech companies in the last five years, with the Commonwealth Bank making AUD 379 million (USD 300 million) investment in Klarna, a buy now, pay later firm. Some banks seem comfortable with the idea of cannibalising their sales by selling via their digital platforms, including NAB having recently announced an agreement to buy the neobank ‘86 400’ after struggling to accelerate the market share of its UBank offering.
Some banks will concede that they have to unbundle some of their services and collaborate with a stronger player, e.g., a full-service bank will partner with a student loan fintech such as SoFi. Integrating fintech’s services into their platform enables a bank to retain customer relationships, even if it has to share the revenue pie with the fintech.
What has the banking industry learned from the ups and downs in the fintech sector?
As with any rapidly growing industry we’ve seen some teething issues with fintech; here are some key takeaways:
- The importance of sustainable growth – To become the next Amazon of banking, businesses ignored profitability for a prolonged period by operating at a loss with lending (only) fintech companies like Prospa and CAN Capital falling under this category. Also, in an environment of low (or even negative) interest rates, many of the neobanks that were excessively dependent on a single commoditised product like ‘savings accounts’ have crumbled, such as local fintech Xinja.
- There is real consumer inertia – In the absence of full banking portability, fintech companies underestimated the friction of moving accounts, cards and mortgages. Most of the neo-banking sector is realising the true cost of customer acquisition. However, open banking changes are likely to have a significant impact here.
- Don’t treat regulation as an annoyance – Some of the fintech companies dependent on regulatory arbitrage will face the heat as regulations evolve. In 2019, Ipagoo collapsed when the Financial Conduct Authority found out it avoided regulation by not properly segregating customer money.
- The clunky backend holds back innovation – While financial technologies have made an impact on the front end of financial services (customer experience, branding, gamification), the back end of the industry (SWIFT, clearing systems) has not seen massive disruption and it’s not likely anytime soon, even with recent successes in blockchain.
What is the current role and future of ‘Big Tech’ (FANG) in Australian banking?
Big tech's participation in the industry is ever-increasing from Apple Pay to Amazon Lending, Google Pay, and Facebook's cryptocurrency. However, the forewarned 'massive' threat to banks is unlikely to eventuate anytime soon as big tech realises that the return on capital in finance is less than the return on technology. However, that might change in the long run. Big tech doesn't yet want to have onerous regulations with a full banking license. However, slowly they will nibble away banks' revenues with agile offerings like Google Pay and the Apple credit card.
What do you predict is next for fintech and the future of banking?
We’ll see increasing consolidation in fintech, just like any other industry, once it becomes overcrowded. Some of the best performing and most mature fintechs will be acquired either by financial giants (e.g., iZettle acquired by PayPal, Kabbage acquired by American Express), by bigger fintech organisations (e.g., paystack acquired by Stripe) or by Big Tech (e.g., Mobeewave acquired by Apple).
Many fintech companies will need to find a ‘purpose’ to be successful. For example, while Paytm and M-Pesa offer many services, at the heart of their existence is the purpose of financial inclusion. Thanks to M-Pesa, Kenya has a higher financial inclusion rate than some countries in the developed world. Fintech that specialises in niche areas will thrive; Quantexa, for example, identified that banks are facing intense scrutiny from regulators for Anti Money Laundering and Financial Crimes. It married domain and data science solutions to develop unique contextual solutions for large complex banks.
Is it a zero-sum game between fintech and banks?
It’s a myth that every fintech competes directly with the banks. While full-service fintech companies (e.g., Ant Group) and single service companies (e.g., Wise.com, most neobanks) do compete with banks, most of them provide complementary service (e.g., Bill.com, Slyp) and are looking to collaborate with the banks.
At the end of the day, who benefits most from the fintech revolution?
The real victor from this battle between banks and fintech is, of course, the customer. Since financial intermediaries play a crucial role in society, technology improvements in this industry have a significant, positive impact on our lives. The booming technology investment centres of a 'customer first' approach differ significantly from the old ways of thinking.
The best days for fintech are ahead of us, and the banks are sitting up to take notice.