The financial services industry is undergoing a significant transformation driven by the ongoing rise of Fintech (financial technology) organisations. These innovative companies continue to leverage technology further disrupting traditional banking models which remain slow to react, offering a more comprehensive range of services with greater convenience, efficiency, and, often, lower costs.
Initially associated with small startup ventures, Fintech has evolved over the last ten years into a multi-billion-dollar industry with over 3.5 billion global users1. Online and mobile banking, digital payments, cryptocurrency and blockchain, Insurtech, Wealthtech, Regtech and AI all classify as Fintech, combining innovation with technology vexing the status quo of incumbent financial services providers.
The effect beyond Financial Services
Fintech companieshaven’tstoppedat expandingsolelythe servicesin the financial sector–they’vefundamentallychangedhow customers interact with their money, altering consumer behaviour across the whole industry.This marks not just a fleeting trend butan evolutionthat hasredefinedthe contours of the banking sector.
A surprising narrativehasemergedmore recently, however: collaboration,andnot competition, might be the key to unlocking the full potential of this transformation.
A history of disruption – Market Dynamics
Traditionally, banks held a dominant position, offering a limited range of financial products and services delivered through physical branches. Fintech's initial impact was adversarial. Their agility and focus on user experience exposed the limitations of legacy bank systems. Mobile-first experiences, streamlined applications, and innovative financial products like peer-to-peer lending androbo-advisors challenged the dominance of traditional banks.
A2023studyby The Federal Reserve Bank of Philadelphia2in the US found that changes in lender quality, including both consumer preferences for better financial services and advancements in finance technology, account for over 50% of the rise in Fintech market share and 40% of the decline in traditional bank market share. Their analysis further suggests that technological innovation within the Fintech sector is a major driver of its disruption and success.
Fintech's impactalsoacts as a powerful driver of economic growth and efficiency in the economy,including:
- Reduced friction and increased access: Fintech solutions like mobile payments and microloans bypass traditional hurdles, fostering financial inclusion and boosting economic participation.
- Innovation & Competition: New Fintech players challenge incumbents, pushing the boundaries of financial products and services. This benefits consumers with wider choices and potentially lower costs.
- Unlocking new opportunities: Innovative technologies streamline cross-border payments, trade finance, and regulations, opening doors for increased international trade and investment.
Classic economic forces like economies of scale still play a role. Large, multi-product providersleveragecustomer data across a broad range of services, potentially leading to consolidation. The key is striking a balance. Fintech's disruptive potential can coexist with established institutions within a well-regulated ecosystem. This collaboration fosters innovation and competition,ultimately benefitingthe economy by creating a robust and efficient financial sector for all.
Banks' efforts to remain competitive
Fintech firms are playing a crucial role by filling gaps in the market, serving underserved segments, andultimately expandingthe overall financial services landscape. This compels traditional banks to re-evaluate their strategies andidentifyareas of true excellence, including superior customer service, a more comprehensive range of products, orleveragingtheir vast data for deeper financial insights.
While the banking sector has undergone profound transformation and volatility throughout economic crises, the COVID-19 pandemic, and geopolitical turmoil, it has maintained profitability and has proven remarkably resilient to such risks. The rise of Fintech presents a new challenge, one that demands not just resilience but a proactive embrace of innovation.
According to banking executives,thedigitalisation of financial services andthe rise of digital currenciesemergeasthedominanttrendsexpected to shape the industry over the next decade.A staggering 54% of the companies surveyed byEconomist Impact & SAS3in 2022 identified these areas as the highest perceived opportunities. This focus underscores the banking sector’s recognition of the need to embrace technological innovation to remain competitive in the face of Fintech disruption.
Customer behaviour and increased expectations
The rise of Fintech reflects a fundamental shift in customer expectations. Today's tech-savvy consumers demand seamless digital experiences across all financial services. Fintech firms cater to this demand with user-friendly mobile apps, intuitive interfaces, and a strong focus on personalisation.
This has prompted traditional banks to rethink their customer engagement strategiestoretainloyalty and attract new clients. Thesestrategiescould encompass everything from streamlined onboardingprocesses toleveragingdata analytics and machine learning for personalised financial advice.Furthermore, the evolving landscape demands transparency and user control over financial data. Advanced technologies are addressing these needs by offering real-time transaction tracking and enhanced control over personal financial information. This empowers customers and fosters a sense of trust with their financial institutions.
Soon, the ability of traditional banks to adapt to these expectations will be a critical differentiator.
The Future: Collaboration or Competition?
Many forward-thinking banks are recognising the power of strategic partnerships with Fintech firms. These partnerships are not about competition but rather about leveraging each other's strengths while aiming to minimiseweaknesses.Bothsidesacknowledgethe potential benefits of working together:
- Fintech firms with an agility and innovation-focused culture find in technology a tool to level the playing field, offering services that challenge the status quo. They bring expertise in user experience design, cutting-edge technologies, and a deep understanding of customer expectations in the digital age.
- Traditional banks, on the other hand, contribute their regulatory expertise, established customer base, and robust risk management frameworks. They can leverage their existing infrastructure and navigate the complexities of regulatory compliance, ensuring a smooth integration of technology.
In the short-term, we can expect an increased emphasis on banks adopting cloud computing, artificial intelligence, andtop-classtechnology not only to match Fintech offerings but also to find new ways to differentiate themselves.
A Winning Partnership Formula: Fintech Agility Meets Bank Stability
Banks Leverage Fintech Agility
- Fintech firms are renowned for their innovative spirit. By partnering with Fintech firms, traditional banks can gain crucial access to this agility, allowing them to introduce new technologies and services rapidly. This can be anything from integrating cutting-edge AI-powered chatbots for customer service to launching innovative mobile banking features that enhance user experience.
Real case scenario4: Collaborations like PTSB and CreditLogic showcase how banks can leverage Fintech agility to streamline processes and modernise offerings, keeping them competitive in a rapidly evolving landscape.
Fintech Gains Stability and Expertise
- Scale and Stability: Partnering with a bank allows a Fintech firm to tap into the bank's established customer base and robust infrastructure. This not only provides immediate access to a wider audience but also offers the stability and security that fosters trust with potential customers.
- Regulatory Expertise: Navigating the complex regulatory environment of the financial services industry can be a major hurdle for Fintech firms. By partnering with a bank, Fintech firms gain access to the bank's deep understanding of regulations and compliance requirements, allowing them to operate within the legal framework and avoid potential roadblocks.
Real case scenario5:Partnerships like the one between Bank of Ireland andWorldFirstallowFintech companiesto tap into vast customer bases and regulatoryknow-how, accelerating growth and ensuring compliance.
Ireland: A Model for Collaboration
According to Fintech Ireland6, which tracks and promotes the Irish fintech ecosystem, there are 280+ indigenous and 130+ internationalfintechsoperating in and from Ireland. Irelandserves as a prime example of a successful regulatory framework that fosters collaboration. The market actively promotes initiatives like regulatory sandboxes, which provide a controlled environment for testing innovative Fintech products and services.
Theimpactof this supportive infrastructure and collaborative spiritdoes not affect only the banks andfintechbutthe market in general, enabling:
- An Enhanced Customer Experience: Partnerships like AIB and Boxever demonstrate how Fintech can personalise customer interactions, leading to a more engaging and efficient experience for bank customers.
- Democratisation of Finance: The KBC and Objectway joint venture exemplifies how Fintech can empower individuals. User-friendly investment tools created through collaboration increase financial inclusion for the broader population.
- Strengthened Security and Efficiency: Ulster Bank and Circit's collaboration highlights how Fintech can enhance security and compliance processes for banks, ultimately benefiting the entire financial system.
This collaborative approach allowsbanks and Fintech firms to navigate the evolving regulatory landscape together, mitigating risks and accelerating innovation.Ultimately, thiscreates a win-win scenario for all stakeholders -banks, Fintech firms, and,most importantly, consumers whobenefitfrom a more secure, efficient, and innovative financial services ecosystem.
Conclusion: The rise of customer-centricity in the digital age
The customer is no longer comparing banking institutions, but experiences. They consider speed, accessibility, responsiveness, and security while prioritising choices and constant effort for improvement.
Beyond disruption, thesuccessful Irish bank-fintech collaborations paint a powerful picture of a future shaped by partnership and healthy competition. They provehow Fintech agility can support banking stability, fostering a more dynamic and customer-centricfinancial services ecosystem.
Change and evolution are inevitable and welcomed in the financial services industry. While banks andfintechsgainfromeach other’s presence, the ultimatewinnersare the customers and the wider economy,whobenefitfrom a more efficient, inclusive, and competitive financial landscape.
About the author
Richard Warren-Tangney, Partner in Financial Services at BDO in Ireland, brings a wealth of experience in guiding business growth across Fintech andBanking sectors. BDO Ireland, recognised for itsexpertisein audit, tax, advisory, and consulting, supports the financial industry's evolving needs with a global perspective and tailored solutions.
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For more industry-related insights, browse theFinancial Dublin Yearbook 2024.
