By Dan Read, partner at law firm TLT
The rise of fintech companies and their disruptive propositions has been an interesting development for the financial services sector, causing existing banks and other financial services companies to assess the extent of their impact on the market and the potential opportunities they present.
This has been particularly true since the introduction of Open Banking and the second Payment Services Directive (PSD2) on 13 January 2018, which opened the door for new platforms wishing to make inroads in the financial services industry. At our recent conference to discuss the early lessons under Open Banking, we heard how all kinds of businesses are already innovating and reacting to the changes, but the real disruption is yet to come.
We have already begun to see a significant amount of change in the payments industry. There are now a myriad of companies that are not obvious financial services players but have engaged in using technology to enable consumer and business payment services – whether through mobile technology, online payment gateways or new ways to handle and manage the billions of transactions processed every day. As a result, banks have needed to identify which services they need to facilitate and support. They have also had to consider whether they themselves need to invest more in enabling digital payments through existing services like contactless, mobile, tokenisation and digital currencies.
Fintech companies have also been making inroads in the retail trading industry. Because of this, banks that have embraced fintech have been able to engage with consumers more effectively through a wider, more convenient offering that meets ever-increasing expectations. The use of and interaction with fintech start-ups has enabled retail trading institutions to be more agile in how they test and adopt new technology. Rather than developing their own software, apps and tools internally, as most institutions have done in the past, they can now go to an increasingly large market to get the best tools for their needs and they also have the commercial leverage to control how that product or service is developed. The diversity of offerings and the customisability of fintech platforms have ultimately helped retail banks become more competitive.
While disruption in these markets has largely been driven by ambitious new fintech players, other institutions are now also grasping such opportunities with the creation of incubators, accelerators and institutionally funded innovation programmes and competitions. There is increasing appetite for institutions to invest directly in fintech companies emerging from the hatchery. Indeed, as we learn more about how the finance services industry is evolving and start to see the true potential for service and commercial innovation, every market player is reassessing and adapting their position.
Institutions are increasingly looking to participate in the fintech market, particularly the regtech market which is set to gain in prominence. Large institutions have many options at their disposal but are predominantly seeking to use a blend of these options to cover all bases for their clients. They are funding innovation through incubators and start-up initiatives, looking at in-house product development and creating their own innovation hubs. They are also looking to either buy-in expertise by partnering with credible fintech organisations or investing directly in fintech businesses.
Some moves will be defensive, while others will be more forward-looking. Either way, as time goes on and the role of technology in financial services grows, it is likely that fintech, regtech, banks and other financial institutions will become increasingly proactive and innovative in their use of technology. In the future, machine learning and AI could assist with process-driven tasks while blockchain could change the manner in which syndicated loan portfolios are handled and transactions are carried out.
As fintech’s dynamic potential is realised, the lines between what is tech and what is finance are set to become increasingly blurred.