After close to a decade since its inception, the Fintech wave is still roaring on – and even though we may all feel slightly blasé by the repeated use of the term itself, there is no hiding that Fintechs are vastly impacting the financial sector in a myriad of ways.

As other industries experienced disruption through rapid digitalisation and new consumer preferences, the world, and especially its emerging millennial consumers, are ever-increasingly demanding the same renaissance to transform financial services. Coupled with never-before-seen challenges fuelled by rising regulatory demands, the time is now ripe for a change of scenery and  pursuing growth in new manners.

A broad spectre of players amongst incumbent institutions, start-ups, and the investment scene, are all reacting in their own varying ways – yet there is no hiding that they all consider the Fintechs’ entrance as an unforeseeable, yet definitive game changer for financial products, servicing and operations.

The evolutionary phasing in the rise of the Fintechs – stage 1, fight

Given the ripples of the Fintech wave, soaring throughout the markets – especially the traditional, long-standing financial institutions have responded with confusion and difficulty on how to navigate a typically static business model now in turmoil.

Whereas the initial surge of new Fintechs was met with fright and aversion from incumbents – criticising the new entrants of lesser imposing rules and regulations, and parading potential security concerns – most of them have now understood that the fight is futile.

The next phase – adoption – though how well?

This first phase of innovative liberation from new companies, and conservative aversion by incumbents, can be (and often is) characterised as a “stage 1” in the evolution of the Fintech wave – most institutions have moved to phase 2. They are removing the resistance to change.

They started seriously investigating the new consumer demands, operational efficiency of the new players, and refocused their strategies around customer journeys, digitalisation, innovation and technological transformation. Consequentially, they have been forced to reconsider their own product suites, modes of servicing, and business model.

In stage 2, we saw two modes of attempting to copy and align the Fintech developments into existing institutions.

The “Follower”–approach – attempt to be part of the movement by supporting a community

A widely used option in attempt to tap into the Fintech scene has been to provide sponsorship and serve as an accelerator/supporting organ to local start-up hubs. Though an easy way to get a foot in the door to become knowledgeable on the latest and greatest developments, one could arguably also dub this as too often half-hearted and less fruitful. Many sponsorship programmes and similar fashion out a loose agreement, turn out more than a logo positioning on one hand, and some financial support on the other. This works however quite well for the Fintechs. They get the important support they need and the Fintech industry grows as a result. But the financial institution supporting an external hub or accelerator relinquishes the control to ensure new solutions fall in line with their business requirements. In general, this modus operandi – though commendable in the sense of supporting innovative forces – more often than not leaves the existing corporation with non-directed investments and merely with good intentions in the pursuit to catch the Fintech wave.

The “Authoritarian”–approach – “We can do it better ourselves”

With immense capital and human resources available, and often witnessing the issue with externally supporting innovation hubs (above), another option in adopting Fintech practices and solutions arise. That is creating your very own in-house hub. Often while still supporting the Follower approach as well as being a part of the financial institution society. Which makes a lot of sense.

Obviously, this own-hub approach eliminated the issue of lacking control in the direction of the innovative efforts. Simultaneously, it signalled a real, tangible investment into the new financial and consumer developments.

Nonetheless, few incumbents have been able to cross that one, pesky and ever-recurring headache – legacy. It is simply a fact that a great indicator of the success of Fintechs has been their lack of baggage and anchoring to historical practices, culture and systems. Innovation requires the tools, mindset and freedom to think differently. When having policies and procedures weighing down innovation centres already from their inception – such an investment, when not carefully designed and supported, becomes an anathema as it strangles the otherwise wild and free setting of a Fintech.

Most large institutions following this path have tried to solve the issue by giving the hub participants very free hands. Often after a selection based on a hackathon or similar. This arrangement works rather well for Fintechs (as the other approach as well) but the downside for the companies is the same as in the Follower approach. Too often, the Fintechs in the hub are not making solutions that solve the most important issues that the company is facing. And even if they do, there are Fintechs outside the hub that often do it better. The Fintechs in the hub solve a lot of other issues and some can even be successful in their own right, but where’s the clear business value for the financial institution in its strive to move into the new?

Fintechgration – the Symbiotic relationships will proclaim the winners of the evolutionary race

In line with the mindset surrounding the popularly dubbed “Exponential Organisations”, both Fintechs as well as incumbents need to strive towards elevated use of external assets – building a network of networks to rapidly deploy or integrate solutions, achieve scalability in offering or attaining a true, varied palette of innovations to your firm. A network that goes beyond the backyard of the company.

The synergies of cooperative and inquisitive stances to your business, whilst realising the inherent strengths and weaknesses, are already entrenching as the key indicator of successfully navigating this new era of uncertainty. Instead of shallow and loosely directed investment in acceleration programmes, or insistency on the superiority of in-house innovative forces – winning incumbents are taking a business-oriented view.

They all take a pragmatic approach – what is my issue, and how can it best be solved? Thereby, they partner with global scanning engines and qualifiers to attain the best solutions or clients in the market. They test it fast, and assess if it works – if not, tweak or reject. If it works – Voilà.

This is the way forward precisely because it is symbiotic. Everyone wins, and moreover – the win is a result of overcoming the previously held hurdle. Whereas a Fintech could never achieve true scale and reach, the existing financial institutions were barred by red tape and old dogs. As the incumbent was struggling with politics and budget allocations for hefty innovation investments, the Fintechs are quick and agile to meet the recorded needs of the market.

As we speak, the Fintechgration phase is beginning to rise. Will you be an early adopter and float to new shores – or stay, battling with trying to get value to the core of your business by taking the two other approaches? We believe that Fintechgration is key, either as a stand-alone approach or as way to complement the two other approaches that are harder to direct.

 

Bent Dalager
Partner
Nordic Head of NewTech and Financial Services
Management Consulting
KPMG

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