Just as the internet has evolved beyond all recognition from its slow dial-up days and limited interactivity, so too has FinTech matured to something altogether more sophisticated.
As mentioned in a previous post, when FinTech originally burst onto the scene just a few years ago its aim was to disrupt - and even directly challenge - the status quo. The majority of those early start-ups were seeking to use innovative new technology to their advantage in a bid to do things better and capture market share. This competitive approach naturally led many incumbent institutions, banks and established firms to regard FinTech with the wary caution, even suspicion.
In some corners of the market this attitude still prevails. A recent poll carried out by Capgemini and LinkedIn discovered that over 43% of executives in the financial services industry continue to believe that FinTechs pose a significant threat to their business. However, while that figure is much higher than I or many in the industry would have perhaps expected, the fact that over half now do not regard FinTech as a danger is a key sign of the shift in attitude towards this market.
Just as Web 2.0 now bears little comparison to its early iterations, the FinTech industry has matured into an altogether more collaborative and sustainable market. In the past few months in particular, I’ve noticed a number of new approaches in evidence as the financial market embraces FinTech and its potential, namely:
• FinTech firms as potential partners: Innovation, adaptability and the ability to develop targeted solutions are the key strengths of the FinTech market. These are skills which larger institutions and banks are eager to seek out. To remain competitive they still need to develop relevant and compelling products, or create automated ways to address their growing regulatory, risk and compliance demands. By establishing direct partnerships with appropriate FinTech firms, they can closely collaborate in the new development of targeted solutions which ensure their technology remains cutting-edge and relevant.
• FinTech firms as investment opportunities: On the other side of the coin, the key challenge facing most FinTech start-ups is a lack of funding, clients and opportunities to rapidly scale their business. Larger institutions can offer help in all three of these areas, in addition to often acting as talent incubators to help FinTechs reach their potential. Recently, for example, US-based Droit Financial Technologies secured $16m of investment from Goldman Sachs, Wells Fargo and DRW Holdings. In addition, this RegTech specialist will also likely benefit from having such a strong level of big-name backing. In return, these firms have ensured that they have a successful technology partner to help them meet the regulatory hurdles that lie ahead.
• FinTech firms as acquisition targets: There is plenty of M&A activity in the FinTech space. This is perhaps the ultimate way for incumbent firms and institutions to ensure they have they have the right technology partners working on developing key solutions in-house. But ultimately they also need to have a clear and compelling business case behind each transaction, as this approach also carries the highest level of risk from the three types of partnership model.
Sometimes, we can even see all three approaches in action. A good example is ICAP - which started working with Abide Financial, the regulatory reporting specialist, as a technology partner. It then opted to invest in the firm in 2015. Last month it took their relationship even further and announced it had acquired Abide, which will now become a key part of ICAP’s post-trade technology division.
While most of those early FinTech firms which tried to compete directly with larger institutions have floundered and failed, I now see more and more success stories in the FinTech space. A large part of this growth is no doubt due to their increasingly sophisticated and collaborative way of working in partnership with the market. So while their technology solutions may continue to be disruptive, and rightly so, this new wave of FinTech development should definitely be viewed by the financial market as an opportunity, rather than as a threat.