Blurring lines between finance and technology, Banks embrace fintech revolution

The line between finance and technology is blurring day by day with the surge in financial technology or “fintech” companies. Leading banks are increasingly taking interest in this emerging space and investing billions of dollars into these startups – Goldman Sachs, J.P. Morgan, Citi and others have invested in blockchain startup Digital Asset holdings; Standard Chartered has invested in Ripple; to name a few.

“Funding of FinTech start-ups more than doubled in 2015 reaching $12.2bn, up from $5.6bn in 2014 based on the companies included on our DeNovo platform”, PwC said in its report.

The obvious question that arises is “How are banks responding and embracing this major paradigm shift?”. EY answers this question in its report “Fintech: Are banks responding appropriately?”, which states:

“Many major banks around the world now has either a startup program to incubate fintech companies, is putting aside venture capital to fund them or is partnering with, acquiring or launching their own fintech startup”.

In “The Pulse of Fintech q2 2016”, KPMG and CB Insights noted that over the past five quarters, Goldman Sachs, Citigroup and Banco Santander or their corporate venture units have each completed seven or more deals to VC-backed fintech companies.

Also, leading financial institutions are setting up innovation labs to explore new and upcoming technologies. Recently, the Commonwealth Bank of Australia (CBA) announced its partnership with banking giant Barclays and has planned to open its space at Barclay’s fintech innovation lab in London. Also, French multinational bank and financial services company BNP Paribas unveiled its new FinTech laboratory earlier this month.

One important area of concern is infusing fintech culture in a major bank. Vicente Quesada, owner of Gauss Trading, explains that there are three tools for digital transformation: the People, the Strategy and the Execution.

• People: Quesada recommended banks to adopt a talent replenishment model, rethinking traditional models, balancing soft and tech skills in all company levels, educating the ones that might be transformed and emphasized on the need for transformative leaders.
   
• Strategy: For devising a proper strategy for transformation, Quesada says that employees should know to answer two questions: one, Where does the company want to go with the digital transformation? Where do I want to go? (objectives); and two, how will I know I am getting there? (Key results to ensure progress is made).
   
• Execution: Quesada says that success in digital transformation requires addressing three areas: Diagnosis (Why?); What to do – initiatives in the short and long term-?; and How to do it? 

As rightly noted by Capgemini, the strengths of banks and fintechs are complementary, which should be leveraged to create a stronger central financial experience for customers. While fintechs excel in agility, innovation and exploiting new technology, banks offer capital, deep customer bases and expertise in working with regulators.