Banking on disruption

14 Jan 2019

Just a few years ago, it seemed as if fintech companies represented a clear and present danger to traditional banks. Today, the picture looks a little different. 

Increasingly, we are seeing more progressive incumbents choosing instead to partner with fintechs in an effort to evolve their own businesses. The result may be a new era of frictionless, more customer-centric financial services.
 
While the literal translation of a disruptor is 'that which causes disorder or turmoil', in business terms, a disruptor is defined more positively as something that creates new markets and value networks, displacing – and possibly even replacing – established, traditional market-leading firms, products and alliances.
 
That can be a scary prospect for incumbents, unless they are able to embrace innovation and be part of the change.
 
In his book, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, Harvard professor and business leader Clayton Christensen explains how good management can be the root cause of a business failing, simply by doing the 'right' thing. Christenson pointed out that the decision-making and resource allocation processes that have been key to the success of a business in the past, can be the very same processes that reject disruptive technologies.
 
Businesses that are unable to embrace game-changing technologies are the most vulnerable to being usurped by new entrants with little or nothing to lose. Start-ups with new technologies initially don't pose much of a threat to incumbents. Instead, they find new, relatively untapped markets, typically characterised by low-margin business, where they can apply their technologies. But, by finding the right market at the right time, these start-ups can advance rapidly, soon disrupting the big players.
 
The question posed to the more mature operators is this: If these new technologies find new customers and new markets, albeit small ones to start off with, how soon before they mature to a point where they take market share away from the majors? Or, taking this scenario further, if the majors invest in start-ups to curtail the takeover of market share, do they risk cannibalising themselves? Therein lies the innovator's dilemma.
 
As far back as 2016 – a lifetime ago in the fintech ecosystem – a PwC report into financial services trends summarised its findings in one line: "The disruption of the financial services industry is happening, and fintech is the driver."
 
The report found that for many traditional financial institutions, this revolution would require a fundamental shift in the identity and purpose of the financial system. Said PwC: "The new norm will involve turning away from a linear product push approach, to a customer-centric model in which financial services providers are facilitators of a service that enables clients to acquire advice and interact with all relevant actors through multiple channels."
 

The attraction of fintech

The reasons that technology is transforming financial services are very simple, says Caroline Vaughan, the head of new business at Innovate Finance in London: "It is optimising every touch point. It looks at consumers first, and at optimisation of process. If you look at traditional institutions, they have the clients but may not have started historically with a client-first digital engagement."

"The flipside of that is that our fintechs are digital first, so they have a nimble ability to develop products in real time for the client, but it is harder [for them] to garner a client base – so you see the partnership of the two."
 

From threats to partnerships

While fintechs are a threat to traditional financial services, Kerry Petrie, the interim general manager of Silicon Cape, a networking non-profit organisation working in the ICT space in the Western Cape, says the narrative has changed from one of competition to collaboration.

"What we are seeing is traditional financial services providers using tech to deliver their services in innovative and unique ways. So, it isn't a case of one taking over the other; it’s about how do we use tech in a way to enable better service delivery?"
Kerry Petrie
"What we are seeing is traditional financial services providers using tech to deliver their services in innovative and unique ways."

Kerry Petrie, interim general manager of Silicon Cape

The big banks have large, expensive legacy systems that are not always well integrated. They may understand what needs to be done but are not necessarily agile enough to do it. Banks also have legacy business lines and revenue streams to protect, making it very difficult to innovate from within. These conditions open up gaps for fintechs to take advantage of.
 
Arif Ismail, head of fintech at the SA Reserve Bank (SARB) in Pretoria, says there is a proliferation of services – including robo-advisers (digital platforms that provide automated, algorithm-driven financial planning services), mobile payments and peer-to-peer lending – that fintechs are producing which the incumbent banks aren't.
 
But that is not bad news for established players, believes Ismail.
 
"Some people say it is the end of banking. I personally don't think that's the case. We will see added services, more convenient services and more frictionless services that are focused on taking care of customers' needs in an easy matter," he says.
 
As a result, says Ismail, a number of traditional institutions are establishing incubators, hubs or accelerators as mechanisms with which to collaborate with fintechs in order to jointly work out where the opportunities lie. "In the initial days, it was a lot more about the fear that 'fintech firms are going to take over the banks'. But we're beginning to see that the tactic emerging is a partnership rather than a contentious relationship."
 
However, while banks have been relatively strong adopters of tech through their history, their size, risk profile and complexity slow them down when it comes to getting leading-edge innovation to market quickly, says London-based John Elliott, head of Fintech and Open Banking Partnerships at Investec in the UK.
John Elliot
"What we will make sure of is that our private banking clients are always able to participate in the innovation that's offered as these types of opportunities enter the market."

John Elliott, head of Fintech and Open Banking Partnerships, Investec.

"How do we compete in an era where customers are demanding better services here and now? The best way, for us, is to do that through partnerships where we can utilise people expertise, capability, innovation and intellectual property that live outside of our organisation."
 
The key to collaboration, says Elliott, therefore lies in an institution looking for the right opportunities for its own client base, rather than a one-size-fits-all approach. Noting that Investec itself is a predominantly niche, private bank very different from the usual commercial banks that take cash deposits and process cards, it's difficult for it to play in the new marketplace that fintechs occupy without collaboration.
 
"What we will make sure of is that our private banking clients are always able to participate in the innovation that's offered as these types of opportunities enter the market."
 

Collaborating is hard to do

Integrating fintech into established companies and setting up successful collaborations are not simple tasks, especially when technology is evolving daily.

According to Murray Raisbeck, global co-leader of fintech for KPMG International in the UK: "Financial institutions too often deal with fintech in a very inefficient, fragmented and tactical manner. The companies that succeed have undertaken careful architecting of their transformation strategy, including the integration of fintech within their organisations."


Can regulators keep up?

Not only is fintech reshaping financial services, but so, too, is the governance thereof and the regulatory challenges that need to be addressed. The SARB's Ismail says regulation is usually playing catch-up with innovation, particularly in the area of cryptocurrencies.
 
"Are we keeping up? I think the answer is yes. We've got processes currently in place inside the Reserve Bank. We have created a dedicated fintech unit to look at these emerging innovations, and we are in the process of unpacking what the risks are, what the benefits are, what the applicable laws are."

Disruption: How much and how fast?

For many players in the field, whether or not fintech will disrupt financial services is now no longer a question of 'if', but rather, of 'how much and how fast?' 
 
Highlighting the proliferation of new fintech startups, Anton Gaylard, the chief operating officer of fintech investment company Crossfin Technology Holdings in Cape Town, says: "It's starting to level the playing field and it's giving everyone similar opportunities to address the same needs. And, whether they are collaborating with the same fintech players or with competitive offerings, they have all sprung up at the same time – it's definitely happening."

 
Banking the unbanked and simplifying people's lives are two of the most appealing benefits of fintech. Many pundits believe that for these to be truly realised on scale, the fintech solutions need to be brought into the banks.

Tanya van Lill, CEO of the Southern African Venture Capital and Private Equity Association (SAVCA), based in Johannesburg, agrees: "As long as the products and services being developed in the fintech industry relate to making our lives easier, and giving access to finance or financial products to those who didn't necessarily have access before, I think the competitive landscape will be one where it's more about how we bring these solutions into traditional financial services models, rather than competing with one another."

One such collaboration, between Investec in South Africa and a fintech called RattleHub, is the launch of "Manage My Life", a digital fiduciary platform available on the company's online banking app. The new feature allows clients to organise all their personal information in one secure online place, from marriage certificates to IDs and social media passwords. It sends alerts when one of your important documents (for example, your driver’s licence or passport) is about to expire.
 

Is collaboration the real disruptor?

Despite the rapid rise of fintech companies globally, the level of actual disruption to date has been relatively low. The reason for that seems to be collaboration.

Referring to it as "the complementarity between the services provided by many fintech providers and traditional banks", Sergio Schmukler, lead economist on the World Bank’s development research group, says that incumbent financial institutions are already making substantial investments themselves into fintech acquisitions, investment funds, incubators and accelerators.
 
Seen in this light, it may be that the real disruptor in this space is collaboration. If so, then the financial services companies that are best able to ride the wave of new technologies into a more responsive future – and possibly, a more profitable one – could be those who are best able to master the delicate art of partnership.

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