Many view the role of financial technology or fintech in retail banking and wealth management as one of introducing new business models that disrupt traditional financial services channels. New apps are being developed in financial services at an impressive pace by startups across the country. We see this with robo-advisors such as Wealthsimple, blockchain companies such as BTL, crowdfunding platforms such as Kickstarter (not Canadian, but our regulators only recently allowed crowdfunding in Canada) and many others. Most technology visionaries see fintech as a threat to traditional bricks-and-mortar financial institutions, of which those unable to respond will surely perish. This prophecy is too narrow, however, and I believe most fintech firms — even those that compete directly with the financial establishment — will ultimately complement existing financial services businesses.
A recent report by McKinsey & Co. published this past July supports this view of a more “friendly” fintech industry. McKinsey estimates that three-quarters of fintechs focus on retail banking, lending, wealth management and payment systems by targeting the end customer directly and bypassing traditional banks. But their research suggests that outside of retail and wealth management, only 12% of fintech companies are viewed as disruptors. In most cases, they are considered to be cooperative enablers or partners to financial institutions, especially in corporate and investment banking, where regulation is strict and client relationships paramount. In wealth management, as in investment banking, though, I would expect this cooperation to grow as regulation will only increase and client relationships, more than anything else, will dictate a financial services company’s success. In fact, as new as the fintech industry is, it has now spawned an even newer one: “regtech.” American Banker reports that banks are trying to better manage compliance — one of the costliest and most troublesome activities — by working with regtech firms.
Those fintech companies that do compete directly with traditional financial services companies will in most cases acquiesce, as one of the greatest obstacles facing fintech companies is awareness. An EY survey of fintech use found that the greatest barrier to its adoption in Canada was simply that people didn’t know about the services that exist; 57.2% of Canadians surveyed said lack of awareness was their top reason for not trying the fintech offering. The larger financial institutions have spent many years and dollars developing brand awareness among consumers and so even if the disruptive fintech is so intuitive that every consumer would switch if given the opportunity, fintechs will need to work long and invest heavily to overcome competing brand messages and tap into the consumer consciousness. Most will be unable to build a brand that breaks through the clutter.
The other obstacles are inertia and risk aversion. If nothing else, the Canadian banks have established a secure and fairly united front in the marketplace, withstanding financial crises and discouraging the consumer from switching to alternative providers. In fact, some truly disruptive technologies may ultimately be tamed by the banks and used to bolster their own service. Blockchain technology, for instance, which has been touted as the newest disintermediating technology that could potentially remove the financial institution from many peer-to-peer financial transactions, is being studied by all the banks. Through the R3 Consortium, the banks hope to create a “walled garden” of bank-supported blockchain protocols that will allow them to leverage the technology without being undermined by it.
So, while some fintech companies will continue to disrupt — either usurping the control of financial services incumbents or dying in the effort — many will adapt their strategies and ultimately support the evolving business models of existing financial services companies. In many financial segments where clients are sophisticated and demanding, increasing regulation will ensure that financial institutions adopt fintech solutions developed to facilitate communications and meet regulatory needs. Astute fintech companies will continue to evolve as providers of innovative financial technology solutions that are focused on enabling their clients’ business — which means making their clients’ offerings simpler, faster and more profitable. Only in rare circumstances will fintech companies disrupt the marketplace and truly threaten the status quo. Most fintech companies will facilitate the flow of capital and the dissemination of information.