There is a technological shift happening in financial services around the globe and it’s asking some big questions about Latin America’s banking sector. From Silicon Valley to Madrid and Sao Paulo to Mexico City, financial institutions are partnering with a growing group of third-party specialists called FinTechs, or financial technology companies, in order to innovate more efficiently, accelerate the deployment of new services and respond to perceived threats.
Investors have taken notice. In fact, global investment in FinTech companies tripled in 2014 to more than $12 billion, and it’s reported that payments-related companies are making up more than 50% of recent deal shares.
What is FinTech? Google has more than 100,000 answers for that very question with various references to “startups,” “innovation” and “disruption.” In reality, these organizations address a variety of financial subsectors from trading to payments. It’s more of a technical park of organizations than a homogenous group with any common purpose or interest. However, the payments space is definitely among the most active and discussed. Why do banks need FinTech? While equities trading and other more lucrative areas of financial services have embraced new technology, consumer and business banking have been slow adopters relative to their customers and the pace of broader technological change. This is largely seen as due to two factors: inflexible core banking systems and risk-averse culture.
Traditionally, banks have zealously guarded their infrastructure, developing large in-house operational teams and building out products and back-office functions in their own silos. This reality is compounded in Latin America, where many core banking systems still run on technology that’s more than a quarter century old and reliable sources of FinTech talent are scarce. Many of these organizations lack formal internal practices for innovation or much tolerance for risk.
FinTechs, on the other hand, often bring a deep understanding of both new and established technologies, experience in interconnecting disparate assets and making them work together, and the determination to address unmet needs and missed opportunities. Once in a while, those opportunities pay off in a big way.
Take PayPal for example. This child of the early Internet and e-commerce—which many argue was a missed opportunity by financial institutions—was purchased by eBay in 2002 for roughly $1.5 billion. Today, after its recent spin-off, PayPal values at roughly $50 billion—almost $15 billion more than eBay.
But not all FinTechs are about e-commerce, mobile payments or disrupting banking at the expense of banks. Many simply see themselves as companies that are good at solving transactional challenges and enabling the kinds of ecosystems and greater interoperability that everyone seems to be asking for.
How banks benefit from FinTech By collaborating with FinTech companies, banks are able to gain some specific benefits.
- Time to market: Generally speaking, a typical bank’s IT department and budgets are focused on security, compliance and uptime. The queue for new projects requiring their review and resources is historically a great place for initiatives to become outdated or die. Some FinTechs today offer turnkey solutions that can be integrated over a private cloud, configured, certified and tested in a fraction of the time.
- Shorter learning curve: Organizations with business lines that are essentially unchanged for decades can be seriously challenged when it comes to delivering completely new offerings. Checking, savings, credit and debit are staples of the industry, but their designs and requirements have little in common with deploying a mobile payments program for the unbanked or a mobile cash collection program for a company. Working with FinTechs, banks can benefit from their scars and help eliminate many of the costly assumptions they might otherwise make on their own.
- Lower costs: Today, making good on the commitment to remove friction from the customer experience, capture new transactional revenues and be more relevant to the client doesn’t have to require a direct investment in lots of hardware, software, connectivity, certifications and personnel. Today, FinTechs can deliver to a bank’s doorstep what they need as a service, and banks can benefit from FinTechs’ development capabilities and innovations at far lower cost by virtue of simply being a client. It’s a way of working that takes getting used to, but the days where every solution had to be “owned and on-premise” are gone.
Today, a private cloud platform hosted in Miami can KYC-clear an unbanked individual in Lima, create an affiliated financial account linked to his mobile and the local payments network, convert his cash to real digital funds (cash in) and settle the sales agent’s commission in less than five minutes. All without the corresponding bank having to write a single line of code.
Banks still have the advantage There’s no denying that the revolution in financial services is real and accelerating. But for all of the investment and talk of disruption, the truth is that banks have the best advantages and opportunities to innovate and create new value. And thankfully, signs suggest that many are becoming more interested in the possibilities FinTechs present to their interests.
For example, BBVA, who together with their FinTech partners, has taken the unexpected step of publishing a series of e-books on the subject and providing an excellent starting point to understanding the opportunities available and how to take advantage of them.
Today, we see more “intrapreneurs” and accelerators flowing out of banks and MSOs that are focused on transactional services. These forward-thinking individuals and teams are more comfortable in the world of open APIs and outsourced corporate cloud services, and are tasked with creating new opportunities. For example, Wayra—Telefónica’s international accelerator for startups—is already supporting more than 130 technology companies in Latin America.
In recent months, we’ve seen greater participation by banks in tech gatherings and regional hackathons focused on payments and apps. Yes, they are outnumbered by startups that can create with tens of thousands of dollars what took millions to develop just a few years ago. But banks are regulated financial entities; FinTech companies are not (although they have to meet many local and global regulations and certifications). Banks have access to funds at a lower cost than just about anyone while startups have a knack of running out of money.
Why can’t my bank do that? Tech has changed the way consumers and corporations interact with each other and banks can’t afford to sit back and do nothing (or too little) forever.
Less obvious, but probably more costly to banks over time, is their increasing disintermediation or marginalization. Startups and digital giants are forcing banks to share relationships with consumers and companies that they once owned exclusively.
The technologies and know-how for addressing clients’ technological needs are available for banks via FinTechs, so that they can quickly start providing new services directly to their customers.
The costs and uncertainties of innovating payments are being torn down by mobile ubiquity, a young social media-savvy population, a growing acceptance of as-a-service models, and policies to stimulate digital money and financial inclusion.
Banks will embrace FinTechs as a means of accelerating transformation once they internalize that they can innovate better, faster and at a lower cost—without compromising visibility, compliance, security and the other important principles that make financial institutions unique entities in our society.