A summary of the ´Fintech Decade´ (2010-2019)
Written by Moises Cohen, Co-founder & Head of Banking at The Floor
In previous Point of views, I discussed both the history as well as the future of banking innovation. A lot of people have since asked me, “What about the present?” So, I will try, in this blog, to give my modest opinion as to where we stand today and my thoughts about what I call the ‘Fintech Decade’ (2010-2019).
Nowadays the banking industry is facing many different challenges…from extreme regulatory pressure, battling for talent, the endless need for cost reduction, to looking for innovative ways to engage with customers. This last point is especially true with SMEs, which is one of the most underserved segments in the banking industry. All the while, banks must keep a close eye on new entrants to ultimately determine whether they are competitors or potential partners.
Until the financial crisis in 2008, most innovation within the banking industry derived from in-house development initiatives or traditional banking platforms implemented by big system integrators, whose main purpose was to maintain the status quo. This approach was evolutive (not disruptive), legacy dependent and had relatively long time-to-market cycles and high cost.
From 2008 onwards, banks came to understand that to stay relevant they needed to drastically reduce costs while also improving customer experience to mitigate customer churn. In order to do this, banks quickly realized that innovation and digital transformation are essential and that “Open Innovation” is, in principle, one of the main catalysts to achieve such goals.
So, starting from 2010, after the initial shock of the financial crisis subsided, many banks began to launch corporate VCs, build innovation departments and look for ways to engage with the ecosystem (accelerators, incubators, VCs, academy etc…). From then onwards, Fintech investments exploded on a global scale.
That being said, while Open Innovation tried to solve the above mentioned challenges, it also brought new ones with it:
- Long sales cycles again (two years on average from the first meeting of a startup with a bank until they moved to production);
- Small vendors lacking financial stability engaging with big corporates;
- Unclear business models of many Fintechs during the first years (B2C vs B2B);
- Regulatory challenges restricting the banks’ ability to share their data externally therefore requiring most of the PoCs to be performed on premise; and
- Multiple Fintech niche solutions required to solve a single banking challenge.
Where do we stand today after the “Fintech Decade”?
Over the past decade, global fintech investments have reached over $150bn(1) but, to be honest, I still haven’t seen many or even any fintech startups that have created a $1bn impact to a bank in terms of cost savings or revenue increase. In parallel, financial institutions have been investing more than $1T in innovation and digital transformation (2) over recent years however, cost to income ratios at a global level have remained stagnant at 55%(3). Increasing profitability in a climate of negative monetary policy rates and competition is hard; in addition, the cost of doing business for banks is ever increasing, especially due to the constant need to adapt to new regulations.
In my opinion, one of the main reasons why banks are still in search of the $1bn impact is because the vast majority of B2B fintech startups, particularly during the first years, only brought very niche solutions to the table (PFM, P2P payments etc.). In parallel banks initially focused on the customer facing and distribution channels while back office operations and legacy systems did not undergo the same level of digital transformation. In other words, the focus was to move to a ”Digital Front” while still keeping the ”holy grail” (legacy and back office operations) in an evolutive mode.
Over the last couple of years, we can see some important changes. First, fintech startups are becoming more mature and sophisticated, shifting away from niche solutions and evolving towards platforms. Banks are willing to compromise and do not require best of breed solutions throughout the whole value chain if they can gain a compelling standardized solution that covers multiple major bank activities end to end (Risk Management, Compliance, Customer Engagement, SME Lending etc.)… so platforms are back again…. The next wave of fintechs will be defined by startups that are able to transition from niche solutions to platforms which will enable banks to become faster and more dynamic in their transformation.
Secondly, although attracting talent still remains a key challenge, banks have made huge progress in terms of their digital transformation journey, and they have become a more attractive place to work at for top notch technologists. Thus, in recent years banks have succeeded to enroll key executives, engineers and entrepreneurs coming from top tech giants and the fintech ecosystem in general. This is a trend that we did not see so much of in the past. This new talent, brings with it both technological expertise and best practices enabling the banks to accelerate their digital transformation. Little by little, banking talent is becoming the mirror image of the tech giants one.
Lastly, we see more and more financial institutions moving back to in-house development. With the new tech talent on board banks feel more comfortable to innovate by means of their own resources, while also selecting key end to end fintech platforms from the ecosystem. So, I believe that with this emerging trend, we will see more and more of a complementary mix of internal development together with external fintech platforms.
Some people might say that we are going back to basics… “In-house development and platforms are back” …and this is not necessarily a bad thing; this time, the approach is less legacy dependent and is launched, in many cases, under a new brand/agile technology architecture which reduces costs and time to market.
Collaboration between all the players involved (banks, tech giants, fintechs and regulators) is the new name of the game and understanding this is, in my opinion, one of the best achievements of the “Fintech Decade”.