Fintechs: The Maturing Visage

Sometimes fintechs appear to be marching ahead of banks and financial services institutions. And at other times, they are in combination bringing disruptive technologies on to the banking domain:

Fintech is better described as a union of financial services and technology bringing in its wake both disruption and synergy. While fintechs are often standalone startup entities, sometimes patronized by financial services firms by way of investment and partnerships, there are also increasing instances of large financial services firms setting up their own fintech divisions, named as innovation centers or centers of excellence. A McKinsey study has revealed that almost 80% of financial institutions have entered into fintech partnerships and the global venture capital investments in fintechs in 2018 have already reached $30.8 billion, up from $1.8 billion in 2011. The study also highlighted that average deal size is growing as well, particularly in Asia, where it is almost twice as large as the global average, due largely to a number of mega deals.

How come financial services institutions patronize fintechs? It is explained that due to factors like consolidation in the industry and regulatory constraints, financial services firms are not able to focus on innovation initiatives. Fintechs are not bogged down by legacy systems and processes and they have the advantage of the ability to develop solutions that compete directly with traditional ones, especially in delivering services. The question for the financial services institutions then is to whether build their own capabilities or get it done with the help of fintechs.

Some of the earlier versions of fintechs, which have come to stay and flourish in the financial services domain, are firms like PayPal, Square and Lending Club. They continue to have an edge because they could be more agile, focused and unencumbered by legacy issues compared to traditional firms. The initial disruption caused by such fintech startups in fact led to the development of a culture of innovation in established companies and make them rethink their own structure and partnerships.