The banking industry, especially after a massive loss of trust due to the 2008 crisis, has long been overdue for a tech disruption. And that’s exactly what’s happening to the banks, many of which realized that they alone might not be able to survive in an increasingly digital world, and that’s exactly when FinTech companies come into play.
Traditional financial institutions and fintech firms have come to a mutual understanding that collaboration – not competition – may be the best path to long-term growth and stability. At the same time, big tech powerhouses have begun to offer financial services, creating what is called a “techfin” solution.
The logic behind this collaboration is simple: the ability to bring the power of banks and fintech firms together to create an entity than either unit could bring on their own. With fintech, the key advantages are innovations, agility, consumer-centric perspective, and an infrastructure designed for digital. Most traditional financial institutions don’t possess such qualities.
However, most banking institutions have a stronger brand recognition and established trust. They also have capital, knowledge of regulatory compliance and established distribution networks.
According to the World Fintech Report 2018 from CapGemini and LinkedIn, in collaboration with Efma, “Most successful fintech firms have focused on narrow functions or segments with high friction levels or those underserved by traditional financial institutions, but have struggled to profitably scale on their own. Traditional financial institutions have a vast customer base and deep pockets, but with legacy systems holding them back.”
The challenge here is the ability to establish an environment where collaboration can flourish as opposed to stalling either partner’s ambitions and interests.
The difference between fintech and techfin is based on the origin of the underlying organization. Fintech is an organization where financial services are delivered through a better, user-friendly experience through digital technologies that reduce costs, increase revenue and remove friction.
More commonly, fintech refers to non-traditional financial offerings such as PayPal, Zelle and Venmo in the U.S. and digital-only Starling Bank, Monzo and Revolut in the U.K. Fintech also includes payment kiosks, POS-networks, and agents automation networks that allow retail shops to provide payment and remittance services. Such services, tailored to take care of its end-clients, are presented by CreditPilot – a FinTech company that offers ready-to-go financial platforms for Mobile Network Operators.
Techfin usually means a technology firm that finds a better way to deliver financial products as part its offered services. Examples of techfin companies include Google, Amazon, Facebook and Apple in the U.S. and Baidu, Alibaba & Tencent(BAT) in China.
Here’s how Jack Ma, co-founder and executive chairman of Alibaba Group, described the difference between Fintech and Techfin.
“There are two big opportunities in the future financial industry. One is online banking, where all the financial institutions go online; the other is internet finance, which is purely led by outsiders.”
In both instances, success of these organizations in finance will be based on the ability for the institution expand offerings in response to consumer needs.
Even with the best collaboration, the ability for banks to compete in the future banking ecosystem will be challenged by the techfin powerhouses. Built from scratch on digital platforms, these massive technology organizations have already found ways to reduce operational costs and monetize their business models.
What’s more, is that FinTech is often generating a level of trust previously reserved only for traditional financial institutions.
An increasing percentage of consumers are opting for financial products offered from these non-traditional firms – especially where the user experience is superior to that offered by traditional organizations.
This is what Renato Andre de Andrade Reis from CreditPilot had to say:
FinTech, working in tandem with mobile operators, can give billions of people access to services like money transfers, in-app purchases, loans, and insurance products. This tech requires minimal investments, because we already have the technology and mobile operators already have the network. All you need is to converge the two.
Experts agree, that demand for products and services from fintech firms and large tech companies will only increase as more consumers become familiar with new digital offerings – just as they did with new tech innovations.
Strict bank policies and processes to use non-digital channels for everyday banking business are going to become a thing of the past. Traditional banking organizations cannot survive by providing just checking accounts and loans. With competitors already eating away at significant parts of the banking value chain, there is growing potential of limiting banks to becoming mere utilities.
The future of the banking will depend on its ability to leverage the power of digital technology to provide services that help today’s tech-savvy customers manage their finances and with that,their daily lives.
As financial and technology organizations change the way we use financial services by offering both banking and non-banking services, the ultimate winner will be the consumer; a tech disruption we can all benefit from.