The 19th century saw the arrival of the Industrial Revolution in the UK – transforming entire industries forever and bringing with it entirely new manufacturing processes.
Move forwards to the present day and the world has undergone a transformation from mechanical to analogue and finally digital technologies, in an era we describe as the Digital Revolution. The financial services sector in particular has been changed forever by the development of these new technologies as well as giving rise to a powerful new industry: fintech.
Fintech – a portmanteau of financial technology defined simply by International Organization of Securities Commissions' [IOSCO] 2017 research report as typically offering one or more specific financial products or services in an automated fashion – was originally heralded as signalling a fundamental reshaping of financial services and in particular the banking sector.
Its focus on technological innovation with the ability to generate phenomenal levels of funding in specially-created development hubs in financial centres around the world led many to question just how much of a threat fintech presents for the traditional banking model.
The impact of fintech
Fintech is a global phenomenon and has played a key role in the technological advancement and growth of financial services worldwide. One reason for this is that fintech is simply not beholden to the same regulatory, legal and infrastructural constraints of traditional banks.
Comparatively unrestrained, fintech has disrupted the industry by quickly developing more agile structures better suited for rapid change, faster operations and maximised efficiencies. That said, the notion that fintech threatens the future of traditional banking or poses an existential threat to the wider industry is extremely unlikely and withstands little scrutiny.
First and foremost, fintech is dependent on the current banking model for underpinning our entire economies and financial systems. Weakening major banks would likely negatively impact the growth and prospects of smaller and less established fintech companies. Just as significant is how fintech companies rely on banks for capital and scale potential as well as data and regulatory support.
Moreover, competitive new solutions, faster processes and increased diversification brought about by the rise of fintech could well act as stabilising counterpoints to any predicted initial disruption for consumers and markets alike.
How banks are fighting back
Recent newspaper articles have typically focussed on the difficulties fintech start-ups have had in creating a banking revolution through the innovative application of technology. The fintech startup Moven recently admitted to the New York Times that they had toned down their rhetoric of replacing the banks, focussing instead on selling their technology to banks.
This points towards the growing trend of mutually beneficial collaborations and partnerships between established banks and emerging fintech companies.
As noted in IOSCO's research report, this could "supplement both fintech new entrants and traditional incumbents" and is increasingly becoming recognised by the big players and disruptive challengers alike as a promising avenue for exploration.
Traditional banks face the prospect of having to adapt in step with the Digital Revolution or risk losing all-important market share. Rather than lose ground to the challenger fintech companies, banks have created a new and mutually beneficial business relationship to forge a productive path forwards.
Unable to match the speed and adaptability of the fintech sector, banks and large financial corporations are increasingly collaborating and partnering with fintech start-ups to share resources, assets and data – driving advancement and growth in the process.
Smart data resulting from these partnerships has immense value and real-world applications from internal systems and management to the end user. The rise of machine-learning technology promoted and developed by fintech companies also helps banks and customers alike make faster and more accurate decisions.
These new algorithms work across areas as diverse and complex as peer-to-peer lending, currency conversions, real-time transparent transactions and insurance analysis without any human interference – removing biases and the likelihood of costly errors at a fraction of the speed.
The smaller and more targeted nature of fintech companies has also made them better suited to developing solutions for specific industry problems. These can then be applied across larger financial corporations and banks without the need to allocate specialist teams, resources and time.
The future of the financial landscape
The real revolution in banking will arise from fintech companies and banks recognising one another as collaborators rather than competitors. Forming collaborative partnerships paves the way for the next generation of technology-led solutions.
Marrying the old and the new combines the best of both while the new relationships between established financial organisations and innovative fintech companies is driving change, progress and development across the industry. Best of all, these new developments will only improve and accelerate in the months and years to come.
Christopher Burke is the chief executive officer of Brickendon, a global management and technology consultancy, specialising in solutions for the financial services industry. He has over 18 years' experience advising and consulting global financial institutions, including banks, hedge funds and asset managers.