FinTech and the Disruption of the Financial Industry

Introduction

Currently, it is impossible to think of a world without the internet and mobile devices. These have become core elements of our lifestyle, and they have brought with them a high degree of disruption in virtually every area of business, with no exception to the financial services sector. This digital revolution is transforming how customers access financial services and products. The financial sector may have experienced some degree of change in the past; however, the constant penetration of technology-driven applications in almost all segments of financial services is something new. The phenomenon that has been accelerating the pace of change and reshaping the financial industry is known as FinTech.

What Is FinTech?

FinTech refers to the use of technology across all financial services functions — for example, replacing paper-based processes with applications and software. In the past, FinTech was mostly used in back-office functions via software aimed at assisting bank personnel to handle accounts, manage customer databases, and execute transactions. However, FinTech has now transformed how many banks operate. Technology is no longer relegated to the back-office; it has taken center stage. FinTech is mainly about innovation, transformation, and disruption, and it will undoubtedly impact and shape how financial institutions across the globe operate. FinTech drives the disruption taking place in financial services, reshaping the way consumers and companies engage by changing how, when, and where financial services and products are provided (Manoj, John, Haskell, Steve, & Dean, 2016). Thanks to FinTech, every digital transaction — from foreign currency exchange and online shopping to money transfers and stock investments — is possible at customers' fingertips. FinTech places technology at the heart of financial services, which fundamentally changes how companies interact with their customers. The proliferation of FinTech has resulted in a number of positive impacts for society, including reductions in prices paid by customers, increased competition, and wider access to financial services among the traditionally underserved.

FinTech sits at the intersection of financial services and technology sectors, where technology-focused startups and new market entrants innovate on the services and products currently offered by the traditional financial services industry (Lu, 2017). For this reason, FinTech has been gaining momentum and causing disruption to the traditional value chain of financial services. The financial services sector is continuously fueled by FinTech. It is no longer a secret that customers are doing more business with non-traditional players, and this is creating uncertainty for the financial industry. Existing incumbents have been forced to react, attempting to work with FinTech in order to leverage the ecosystem that has been created. This means they need to turn innovation into an advantage and eliminate concerns about their businesses being at risk. It should be understood that the accelerating pace of technological change is both the most creative and the most destructive force in financial services ecosystems today.

The main drivers for FinTech have been mobility and the internet. With the increasing penetration of smartphones, customers have an easier way to interact with their respective banks and get real-time views of their bank accounts. As mobile applications grew in sophistication, so did customer needs and demands for more intuitive banking services. Digital transformation in the banking industry, coupled with mobility, has managed to transform the very nature of banking. Customers no longer have to endure long queues and waiting times in bank branches in order to deposit money, request checkbooks, or conduct trades — they can perform all of these functions directly from their mobile phones.

Current Status of the FinTech Industry

The FinTech industry has experienced exponential growth within a short period of time. In just one year, between 2013 and 2014, the FinTech industry grew by approximately 400 percent — from $3 billion to more than $12 billion. The industry saw total global investment from 2010 to 2015 of $49.7 billion, with 25 percent of that — approximately $12.7 billion — invested in the first and second quarters of 2015 alone. In the first quarter of 2017, the industry received $1.8 billion in global investment. This demonstrates that the future of FinTech is bright and growing with each passing year. According to the World Bank Group, close to 42 percent of the global population does not have access to any formal financial system (Oshodin, Molla, Karanasios, & Ong, 2017). This fact presents a huge opportunity for the FinTech industry to tackle — one that traditional financial institutions have been unable to address.

It is worth noting that the largest area of FinTech investment has been in payment processing and lending solutions. In the recent past, however, emerging technologies such as peer-to-peer (P2P) blockchain — popularized by Bitcoin — and cloud-based technologies that increase the speed and security of financial networks have received strong support. Financial institutions are embracing the disruptive nature of FinTech and forging partnerships in an effort to sharpen their operational efficiency and respond to ever-changing customer demands for innovative services. For this reason, funding for FinTech is shifting from a venture-capitalist-dominated field to a more mainstream investment category. According to Manoj, John, Haskell, Steve, and Dean (2017), funding for FinTech startups has increased at a Compound Annual Growth Rate (CAGR) of 41 percent over the last four years, with over $40 billion in cumulative investments. It is apparent that cutting-edge FinTech companies and financial innovation are changing the competitive landscape and redrawing the lines for the financial services industry.

The United States offers the most attractive ecosystem for FinTech startups, primarily because it is where the largest percentage of capital originates. Existing giants continue to invest millions each year in FinTech innovation, making the US a prime location for developments in the financial sector. However, FinTech is not confined to the US — it is everywhere. The technology can be found in payment methods and lending taking place globally, with innovations rooted in different parts of the world.

Conclusion

The disruption of financial services is well underway, and it is being driven by FinTech. Financial services providers need to recognize the impact that FinTech has on the industry and focus on its positives in order to embrace the technologies involved. Consumers have changed the way they interact with financial services, and it is vital that institutions recognize this fact. Leveraging emerging technologies and focusing on the customer will allow institutions to innovate and offer solutions that are attractive to consumers in an increasingly competitive landscape.

References

Brandl, B., & Hornuf, L. (2017). Where did fintechs come from, and where do they go? The transformation of the financial industry in Germany after digitalization.

Gomber, P., Kauffman, R. J., Parker, C., & Weber, B. W. (2018). Special issue: Financial information systems and the FinTech revolution. Taylor & Francis.

Lu, L. (2017). How a little ant challenges giant banks? The rise of Ant Financial (Alipay)'s FinTech empire and relevant regulatory concerns.

Lu, L. (2018). Decoding Alipay: Mobile payments, a cashless society and regulatory challenges.

Manoj, K., John, S., Haskell, G., Steve, D., & Dean, N. (2016). Blurred lines: How FinTech is shaping financial services. Retrieved from PwC London, UK: https://www.pwc.com/id/en/financial-services/fs%20publication/FinTech%20Global%20Report.pdf

Manoj, K., John, S., Haskell, G., Steve, D., & Dean, N. (2017). Redrawing the lines: FinTech's growing influence on financial services. Retrieved from PwC London, UK: https://www.pwc.com/gx/en/industries/financial-services/assets/pwc-global-fintech-report-2017.pdf

Oshodin, O., Molla, A., Karanasios, S., & Ong, C. E. (2017). Is FinTech a disruption or a new ecosystem? An exploratory investigation of banks' response to FinTech in Australia. Paper presented at the Proceedings of the Australasian Conference on Information Systems.

Shim, Y., & Shin, D.-H. (2016). Analyzing China's FinTech industry from the perspective of actor–network theory. Telecommunications Policy, 40(2–3), 168–181.