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Are Fintech Firms and Financial Institutions Finally Coming Together?

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The benefits to partnerships between startups and incumbents far outweigh the risks in the financial services sector.

by Sid Probstein, Chief Technology Officer

The rise of the digital economy has seen financial institutions being put under the kind of pressure from fintech companies that they have never experienced before. Their size and the stringent regulatory environment has made it hard for them to adapt. A variety of complementary factors, such as the incredible power of mobile devices, big data, cloud computing, and social media have leveled the playing field for smaller, more agile fintech companies. They are positioned to eat away at the market dominance once enjoyed by larger players.

But there are signs that dynamic is now changing, and a more conciliatory approach is underway. While the financial institutions are rattled by the changes they see in the marketplace, both sectors of the market have something to gain from working together to service a new generation of consumers.

According to a Global Fintech Report from PriceWaterhouseCoopers, established financial institutions feel overwhelmingly that:

  • They feel they need to innovate more
  • They are losing clients to fintech firms
  • They expect to be partnering with fintech firms in the next five years

This new attitude of co-operation is a sea-change from just a few years ago and reflects the fact that younger, mobile-first consumers are not impressed as much by a long, track record as they are by ease-of-use and tech-savvy products.

Every day there are new iterations of products and services on offer, but broadly speaking, the Report zeroes in on blockchain and AI being the arenas where the most disruption will occur.

The Spread of the Blockchain

The idea of using blockchain networks in the form of a decentralized, encrypted, and public ledger has risen to prominence in the last few years, and its compelling structure is hard to understate. Thanks to the popularity of bitcoin, the potential of blockchain to disrupt the mainstream economy has been noticed, but there is so much more to come, and financial institutions are discovering new uses for it every day.

Finance professionals said that the most likely uses of blockchain were payments infrastructure, fund transfer infrastructure, and digital identity management,” writes Tom Groenfeldt for Forbes magazine.

While it is within the capabilities of larger institutions to develop this technology on their own, it makes far more sense to work together with fintech firms who specialize in blockchain to develop new offerings and services that will lower costs, provide more efficiency and far more transparency into the financial services that they make use of.

For example, a startup called Ripple is using a cryptocurrency called XRP to solve the liquidity problem that slows down the transfer of money across borders. By using XRP, a cryptocurrency built as a ‘bridge currency’ between two national currencies, banks on the network can speed up transfer times and lower costs by up to 70%. That’s the reason why Ripple is signing up one bank per week as a technology partner to facilitate transactions at lightning-speed.

The initial appeal of the blockchain and cryptocurrencies was their anti-establishment nature, but like all things disruptive, they quickly move into the mainstream and get absorbed.

At this stage, the most likely beneficiaries of blockchain solutions will be

  • Payments Infrastructure
  • Fund Transfer Infrastructure
  • Digital Identity Management

The section of the PWC report on blockchain concludes that ‘the technology is moving from hype to reality and we will likely see business use cases becoming more common that are used to ‘to sharpen operational efficiency and respond to customer demands for more innovative services.”

So what’s in it for the fintech startups? Why would they want to partner with these large yet slow financial institutions? Simply put, that’s where the consumers are. You can have the greatest tech in the world, but if you have no customers, then it’s worthless. And it’s difficult to get people to invest their money into new, untested companies. Far easier to partner with those companies, access those markets and attempt to change them from the inside.

There are also major threats to the financial services sector from tech giants like Google, Facebook, and Amazon who have the potential to change any sector of the economy quickly. With the recent news that Facebook has set up an in-house blockchain division, it seems those global players will only be held at bay by a culture of innovation and responsiveness from the financial sector.

Image Source: Shutterstock

The Rise of Artificial Intelligence

Alongside blockchain, artificial intelligence is the other arena where remarkable innovation is taking place. Developments are being driven by the work of startups that have attracted investments in the region of one billion dollars each on average.

Technologies such as ‘enhanced biometric security, natural language searches, and chatbots’ are areas where financial institutions are seeing the most promise for their own processes and efficiency, as well as substantial sectors in their own right that are worthy of investment.

While AI moves from theoretical to actual, many financial institutions are focussing their technology efforts on improving their mobile (51%) and data analytic (74%) capabilities, while partnering with fintech firms to tackle the more AI-focussed innovations.

As they adopt these solutions,” the report reveals, “they are not only focusing on enhancing client service but also on improving efficiency, reducing costs, increasing security, and making processes more agile.

The Power of Convergence

The convergence of the sector will have far-reaching consequences.

Very few people still question the massive potential that fintech offers to those who get it right.

AI and blockchain together are capable of fundamentally disrupting the ways that business is conducted in the digital economy, but in order for that to happen, there needs to be a fusion that occurs between the innovators and the incumbents in order to deliver the kinds of service that banking, wealth management, insurance, and mortgage providers want to be able to offer their clients.

AI FOUNDRY works with financial service organizations to drive efficiency, use their data to extract actionable intelligence that can drive good decision-making and help financial institutions adapt to the new environment.

For more information on how to unlock the valuable insights contained in your data, and how to develop your own digital strategies, visit the AI Foundry website where we share our processes and solve problems for our customers.