Disruption is a painful process. Inherent in the term are ideas of disturbance, problems, dislocation, prevention. No-one’s ever enjoyed disruption from traffic or a disruption to their family meal. Disruption is often unwanted or unwelcome.
Globally, we’re all living through what is perhaps the greatest disruption to our way of life in the last 70 years.
That’s why the language of “disruption” to the financial services sector from fintech market entrants might, culturally, seem like a less than ideal way to frame how we can bring about progress and development in the sector, as well as innovation to the services we provide our clients and consumers. Maybe the disruption caused by COVID-19 has created an environment to challenge just how welcome the idea of “disruption” really is.
The established players in the financial services sector definitely have issues within their businesses which need challenging. Legacy technology and technical debt, for instance, overly cautious internal compliance systems which could be streamlined to help accelerate change, outdated onboarding and KYC procedures or huge levels of interest from cyber criminals who are constantly attacking their infrastructure.
However, they have a great many strengths to their businesses too – they have huge resources that they are able to allocate to solving problems. And they have established brands, which are the sediment of years of investment; they have trust, maybe in part as a result of the brand building they have done.
Challengers in the face of disruptive startups have played a significant role in bringing the need for change to the forefront of the agenda, and have followed different routes and strategies to attack and disrupt the incumbents. But it seems that this stage is coming to an end – at the moment, the approach that I’m seeing pay off more widely across the sector is not one of challenging, but of collaborating.
There is evidence of this at work across the global fintech space: Lloyds Banking Group’s investment in Thought Machine and the global partnership between HSBC and Bud are just two examples of where banks and fintech start-ups are working closely together to the benefit of their customers. Visa’s acquisition of Plaid is a demonstration of when this collaboration gets taken to the next level.
Fintechs can work with the existing players in the banking and payments space to ally the energy, innovation and pace of implementation of a fintech with the resources, experience and credibility that the established corporates have. Advances in both technology and regulation definitely help support this innovation. Increasing use of APIs in financial services and developments in Open Banking and Open Finance will definitely help create a shared set of protocols and processes for collaboration. And from this will come innovative new products and services.
But regulation and compliance can raise their heads as frustrating stumbling blocks when it comes to driving successful collaboration between fintechs and larger corporates. Fintechs are often, by definition, unregulated and so when it comes to cooperating with financial institutions there is often a lack of understanding of what is a very complicated regulatory framework.
I know from my own experience that these hurdles can be overcome by fintechs actively seeking to comply with regulation so that what is offered is “institution-class”, and which removes the headaches for regulated entities when it comes to building out their partnerships. A new breed of fintechs are appearing, bridging the gap between runaway, disruptive ideas and down to earth, complex, regulatory frameworks. I call these “regulated fintechs”. They have a big part to play in this process as they are driven by innovation but at the same are fully regulated. They bring the best of both worlds, which helps them substantially shorten the time to market.
But these challenges can also be tackled by implementing specific tech to solve particular problems. Be that via ecommerce, mobile payment or wallet solutions – these are just some examples of areas in which I have seen vast amounts of both innovation and demand in the industry recently. By operating in a more agile and modular fashion and deploying those modules at speed, different technologies can become integrated “point solutions” within existing regulated entities quickly and easily, thereby building seamless collaboration.
A new trend, which I’m now observing with interest, is another catalyst for closer collaboration between fintechs and established players: the advent of BigTech. Tech behemoths such as Apple, Facebook, Google, Rakuten are all moving into the financial sector, they command enormous resources and have billions of clients. No one can compete against them alone, and so successful responses to their market ambitions require full blown cooperation. And hopefully an adequate regulatory and supervisory reaction.
I know that the tangible improvements in services that we, as fintechs, allow our partners to achieve come from both a recognition and deep understanding of the regulatory framework of the finance industry, as well as an agile, modular approach to implementation. Meaningful change comes not from disruption, of tearing-up the status quo and trying to start completely from scratch. In the current climate, real change comes not from challenging, but from collaborating.
Ivo Gueorguiev, co-founder and executive chairman, Paynetics