Traditional financial service providers had things all their own way for far too long. Banks, insurance providers, credit-card issuers and stock brokerages have all operated in industries where the requirement for substantial fixed assets acted as a significant barrier to entry. However, with the arrival of the financial technology (fintech) sector, now new businesses can run complex operations virtually, making all that infrastructure more of an encumbrance than an asset. That has put the traditional financial service providers firmly on the backfoot.
Many of the traditional financial institutions have been slow to respond to the rising challenge they face from the digital disruption that’s sweeping the industry. Others have been more successful in their attempts to counter the fintech revolution by adopting one or more of the following strategies.
1. If you can’t beat them, join them
Over the years, many institutions have come to terms with the fact that fintech is here to stay. The digital competition in certain sectors has been so great that some firms have had to amend their business models entirely. They have chosen to launch their own digital services to enter into new markets or defend their patch. However, that’s not to say that launching digital services is easy. Even with the resources available to some of the world’s largest financial organisations, many have still struggled.
Late last year, UBS announced it was closing its automated online investment service, Smart Wealth. Launched in just 2016, the project was part of a $1bn investment to try to attract new clients. However, the high minimum investment limit and cost of using the service meant it didn’t gain sufficient traction.
2. If you can’t join them, buy them out
Given the size of some of the traditional financial service providers, changing the direction of the business is an expensive and time-consuming process. Many firms are also hampered by their outdated systems and the skills of their staff. For that reason, some firms have decided that it would be quicker and cheaper to simply buy out their digital rivals.
One institution that’s taken this approach is the Spanish bank BBVA. It has acquired a number of fintech businesses over the last few years. It currently has a 39 percent stake in the UK challenger bank Atom Bank, and has recently been name-dropped in takeover talks. It has also invested $250m in a standalone venture capital fund so it can acquire an early stake in some of the most innovative fintech firms around the world.
3. If you can’t buy them, become a partner
One of the biggest challenges traditional financial service providers face is that they are simply not able to compete with the fintech upstarts on a level playing field. Some fintech companies are able to offer their products without the burdensome regulation that binds traditional service providers. One way for institutions to overcome that hurdle is to partner with tech companies and gain access to a new range of services and deliver new products to the financially underserved.
From venture investing to corporate-startup engagement programmes, there are now a number of different ways traditional financial service providers are utilising the accessibility and agility of fintechs to increase their own offering.
Mike Smith, director of fintech platform Business Expert, is a supporter of the partnership model. He said: “Partnerships between fintechs and traditional institutions are mutually beneficial. By combining their strengths, both parties can reach new customers, scale up their businesses, improve their competitive position and boost their product efficiency.
“Fintech firms that are reaching saturation point in their native digital marketing channels can also benefit from the compliance and regulatory competencies of traditional firms as they scale up.”