Keith Fingleton, Chief Technology Advisor – Financial Services at IDA Ireland
Digital disruption powered by nimble startups has bitten at the heels of many large financial organisations but now the banking behemoths are striking back.
Fintech’s first wave was all about new names targeting businesses and consumers with services like money transfer, foreign currency exchange, and even loans. We now live in a world where Apple, a company best known for making a smartphone, could conceivably become a bank. Last year, the UK saw the launch of several challenger banks including Atom Bank which began offering savings and followed up with mortgage services. More expansion is expected during 2017.
Global tech sector giants are also set to engage more in fintech opportunities. The Chinese ecommerce giant Alibaba Group is said to be targeting promising companies in the fintech space as part of its global expansion plans.
All of this adds up to a very vibrant sector. According to KPMG, venture capital funding to global fintech companies reached a record $13.6 billion in 2016 and overall investment in fintech companies totalled $24.7 billion.
Now, it seems financial providers are looking to reclaim the ‘fin’ in fintech. As the technology matures, traditional financial services companies are embracing it because they see the possibilities for improving their internal business processes, saving costs and making themselves more competitive.
“The general narrative two years ago was that fintech was synonymous with disruption, and that banks are dead. That has really changed: now, the majority of fintech companies are not disrupting, they’re enabling – and that’s a very interesting dynamic,” comments Keith Fingleton, chief technology advisor for financial services with IDA Ireland, the inward investment agency.
Similarly, Brian McCabe, who chairs the fintech working group at the Fintech and Payments Association of Ireland, doesn’t subscribe to the notion that existing banks and financial players will be weakened at the expense of newer entrants.
What’s changed is that many of the latest developments in fintech are increasingly focused on the customer. “They’re all about providing a better customer experience, at lower cost, that will ultimately allow providers to build the next generation of products,” McCabe says.
The phrase ‘open innovation’ will become more prevalent in the next phase of fintech, McCabe predicts. “While most companies have been internally focused, there’s now a need to bring outside thoughts in, and to understand the market more,” he says.
“The term ‘open innovation’ is about the need to understand where new products are going to come from, and to do that, you need to think outside the four walls of your own organisation, such as setting up external research labs with third-level institutions. It’s all about bringing in other views, and other methodologies like design thinking. Banks are pushing the envelope a little more because they’re having to become more consumer oriented,” McCabe says.
“Banks have to evolve and find new markets, build more demand, and create new products. You can lead the change, or be part of the change, but if you’re a passive entity, you’re vulnerable to being outdated. If you are leading, then you’ve a better chance to align your product sets towards changing consumer behaviour,” McCabe says.
Anna Scally, partner and head of KPMG’s fintech practice in Dublin, says this collaboration trend is becoming more pronounced. “Traditional banks, financial institutions and insurance companies in Europe seem to recognise the importance of becoming smarter, more efficient and customer focused. Many appear to have realised they cannot make this transition alone and have started partnering with fintechs in order to advance their own capabilities and create distinct competitive advantages in the marketplace,” she says.
Scally offers several explanations why the flurry of fintech activity is happening now. “The model for traditional banking was turned on its head following the financial crisis and, combined with advances in technology, a clear path was made for startups and disruptors to enter the market and create compelling alternatives for how we ‘do’ financial services. Of course, innovation would have happened eventually but startups definitely helped shape the conversation for innovation in financial services and they certainly set the pace,” she says.
Scally expects to see fintech further in the spotlight this year in response to the Payment Service Directive 2 (PSD2) in Europe and the commitment to open banking by other governments and regulators. “This will likely bring increased investor interest in complementary technologies, such as data and analytics and among corporate investors, artificial intelligence [AI] will likely be a hot area for investment. Most major banks are keenly interested in finding ways to reduce costs and see fintech and AI as a key mechanism to achieve this,” she says.
Keith Fingleton of IDA Ireland points out that financial services companies haven’t just woken up to innovation – some have been active in this space for some time. For example, Citi established a Dublin R&D lab as far back as 2009, in the teeth of the financial crisis. “Companies like AON, Marsh, AIG, MasterCard, MetLife and others are working on high-end technology and technologies like data analytics and blockchain in Ireland,” he says.
Ireland is particularly well suited to building a fintech ecosystem comprising all of the elements because it already has a nexus of financial services providers and some of the leading names in technology and social media, creating a kind of perfect storm of expertise, Fingleton adds.
“Most people think only about startups when they think about fintech, but multinationals based in Ireland are just as interested in the startup ecosystem. There are some very large players looking at a technology like blockchain. If a financial provider is looking for process efficiency, Ireland is a great location to do that,” he concludes.