Article by Pierre-Alexandre Rousselot for Banking & Finance 2016-2017
Digitalisation is now affecting all sectors, and financial services are no exception. Technology has conquered large swathes of the industry, and a group of players supporting this innovation has emerged: Fintechs. A contraction of “finance” and “technology”, these are companies – start-ups and emerging companies – which inject innovation into traditional financial services or products. Far from being a flash in the pan, these companies have had a major effect on the financial world. The main activities that are involved: banking and wealth management. The following article written by Pierre-Alexandre Rousselot is published in Banking & Finance 2016.
Fintechs: a tsunami in the world of financial services
Fintechs have caused an unprecedented wave of disruption which has particularly affected banking and asset management. We estimate that the proportion of activities threatened by 2020 will be 28% and 22% for these industries1 . Digitalisation of the customer relationship and disintermediation through digital technologies are quickly transforming the way that banking and financial services are “consumed”. Cost reduction, process simplification, high levels of connectivity – Fintechs are giving (back) the power to customers. Once you’ve experienced digital technology, it’s rare to want to go back. One of the strengths of Fintechs is satisfying customers who are not satisfied with traditional banking first of all, and then customers who are just looking for a simpler, more efficient and fluid relationship. 100% online banks (pure players) are exclusively focused on the needs expressed (or not) by customers. Now only 17% of customers visit their bank more than once a month. This was 62% just five years ago2 .
The success of Fintechs is specifically based on dealing with needs which are not met by traditional financial services, particularly amongst Generation Y consumers – the “Millenials” (people born between 1980 and 2000), a highly connected, demanding and volatile section of the population. While human interaction is still favoured for some services (loans, for example), a digital communication and purchase channel is no longer a choice for banking sector players, nor a source of differentiation. Fintechs are revolutionising by using and exploiting a resource which has been underused by traditional financial services until now: data.
A major asset of Fintechs is perfecting data analysis to better identify and quantify risks and to automate asset management. These technologies, relating to data modelling and processing, help create investment prediction scenarios. Once costly and only used by the largest organisations, these solutions open up access to information, allowing small players to access the market. Therefore, in the wealth management industry, managers are equipping themselves – or considering equipping themselves – with centralised management solutions that can process data and analyse it at all stages: management of the customer relationship, portfolio management, compliance and integration of data generated by the customer themselves for investment decisions. There is another development which is going to rattle the traditional world of finance: the arrival of robo-advisers. By reducing human involvement to a minimum, this new type of automatic wealth management adviser lowers the cost of asset management. Therefore, this technology helps offer high-quality services to people who have lower levels of assets than the amounts usually required.
Working towards the “Fintegration” of traditional finance
While Fintechs are shaking up and weakening the world of financial services, banks, insurers and wealth managers are slowly waking up to the advantages of working with these new players. This association helps to offer innovative solutions and an improved customer experience to customers who are increasingly focused on digital technology.
For Fintechs, this connection offers the opportunity to access the banks’ large base of loyal customers with a trusted relationship already in place, and to benefit from their experience in managing risks and compliance. In addition, they can rely on a large range of financial products and the financial solidity of these banks and the managers in place. In return, most traditional organisations can use Fintechs to gain access to unprecedented technological agility in their industry, as well as an understanding and control of specific application solutions and technologies. A merger between the two worlds now seems increasingly likely. It still remains to be seen which model will prevail – a peaceful co-existence between Fintechs and traditional financial services, progressive “Fintegration” of traditional organisations, or complete market domination by Fintechs.