Harnessing the Fintech Opportunity - An HSBC Industry View
by Mark Evans, Head of Payments Advisory, Global Liquidity & Cash Management, HSBC
One of the most frequent debates in the financial media that has arisen over the past year or two is the potential impact that financial technology (‘fintech’) providers will have on the traditionally unassailable banking domain. With regulations such as the Payment Services Directive (PSD) that break apart the competitive landscape to allow non-bank payment services providers (PSPs), marketplaces that blur the distinction between users and providers of ecommerce, and new players emerging to fulfil demands for commercial credit, the transaction banking landscape is more colourful than we have seen for many years.
Phases in fintech evolution
There is a great deal of speculation about the potential relationship, and competition between providers of innovative financial technology and banks in the future. According to a recent McKinsey study (Cutting through the noise around financial technology, February 2016) fintech companies have the potential to carve out a significant share of banking revenues, particularly in payments, supported by significant venture capital investment, nimble business models for acquisition and servicing of customers, and innovative use of data. With the number of start-ups in the fintech space exploding over the past year, from 800 in April 2015 to 2,000 in February 2016, many of these companies are still in the first phase of the fintech lifecycle, namely the honeymoon stage of ‘selling a dream’, enjoying the luxury of identifying and exploiting a market need at a speed that banks are largely unable to fulfil. The rapid expansion in fintech caught banks largely unawares, which gave rise to the second phase in the fintech evolution. Many banks responded to the growth of fintech by investing in these firms, often without understanding their capabilities, potential or ability to be integrated into the bank’s wider infrastructure and service offering. In some cases, these investments have proved successful, but not universally: however, whatever the financial success of these initiatives, they often fulfil banks’ aim to demonstrate their commitment to innovation and exploring new opportunities.
Although the number of fintech start-ups continues to grow, we are now entering a third, more measured phase. No-one wants to repeat the experiences of either the hype that preceded the ‘dotcom bubble’ or the over-extension of the global financial crisis. As a result, both fintechs and banks are taking a more sober and mature view of the potential that innovative technology has to challenge and transform existing business models in the financial services industry:
Firstly, it would be wrong to assume that fintech companies exist and operate independently of banks: in reality, these companies already use banks as credit suppliers, merchant acquirers and infrastructure providers of solutions such as mobile wallets.
Secondly, by increasing, rather than reducing this co-operation, the potential to turn great ideas into great solutions that have the scale, resilience, and regulatory support to make a real difference to business models is greatly enhanced. This benefits both partners, with fintech companies gaining market access and infrastructure, while banks can leverage innovation opportunities for efficiency in the way that they structure and deliver customer solutions.