Collaborative challenges in the financial industry
As firms transform and digitalize, the banking and financial industry is witnessing its fair share of artificial intelligence, blockchain technology, machine learning, robot advisors and many other technologies. The rise of fintech has been helped by advancements in data science, the increased computational power to process large datasets and the penetration of smartphones has helped in widen the distribution channel across the globe by providing innovative financial services.
However, the impressive growth witnessed by fintech startups does not come without challenges. This is not to say that well established incumbents are not facing any challenges of their own. Many well-established players in the financial service industry fear losing their market position if they fail to quickly become digitally capable.
Figure 1: Top five challenges that incumbents and fintech are facing
Incumbents jumping on the digital transformation bandwagon by investing heavily in tech will only add more costs to an industry that is suffering with both profitability and solvency, which is why collaboration with fintech is a quicker and more feasible option.
The fintech-incumbents collaboration is still in its early stages, with some challenges that need to be addressed such as culture differences, IT system adoptability, divergence of tech supply and demand, regulatory uncertainty and trust in order to create smooth cooperation between the two. Therefore, both incumbents and fintech ought to believe in the power and benefits derived from collaboration and address any hurdle they face.
The major collaboration challenge facing incumbents and fintech is the cultural differences between long established financial institutions and start-ups. This is seen to be the toughest issue to face when collaborating. One perspective is that incumbents might need to overhaul the way they operate as change may lead to fierce resistances. As old, traditional and immensely bureaucratic organisational structures restricts the progress of change within incumbents. The cultural clash between incumbents and fintech firms is based on the gap in the number of years being established and the environment that both parties have been accustomed to.
Looking at it from the view point of the incumbents, to adopt fast-changing technological environment, incumbent’s organisational culture will need to be altered towards becoming dynamic, agile and innovative in nature. Incumbents tend to take longer when devising and implementing strategies, whereas fintech firms undergo the whole process in a fraction of the time frame. This could be the bureaucracy that has been built and accumulated overtime, which led to deficiencies in the way incumbents operate.
Another challenge is the visible gap between supply and demand of technologies within the fintech ecosystem. Global PWC survey identified that the most demanded technologies consist of data analytics, mobile banking, AI, cyber security and robotics, which all fall under the information processing division. This is immensely lacking in banking industry, and with the fast pace digital transformation witnessed in other industries, the financial industry needs to be innovative to bridge the gap between supply and demand for banking services. Regarding the supply side, incumbents will have trouble finding a sizable partner to collaborate with, as start-ups are deemed problematic to collaborate due to the lack of experience and understanding of the regulatory obligations that Incumbents face.
The geographical location of both incumbents and fintech play a role in the ability to collaborate. Innovation hubs located in specific cities around the world such as London, Dublin, Stockholm, Berlin, New York, Silicon Valley, Hong Kong, Singapore, Sydney; Tel Aviv and Nairobi can lead to spillover effect within these locations when compared to other cities around the world. Therefore, locational proximities are important as incumbents look towards collaborating with firms that are easily accessible and are under the same regulatory banner.
The willingness of start-ups to attract financing opportunities from incumbents are high. This type of investment may hinder the ability for a viable exit strategy, due to limited options available for both entrepreneurs and investors. Collaborating and being funded by incumbents may restrict fintech activity and growth prospects as fintech firms start to take on the image of incumbents and all the things associated with that image, which may be restrictive in some cases.
Looking into the future a balance between Fin and Tech should be sought, which will bring about real change in the financial industry. This can be through incumbents collaborating with each other rather than collaborating with fintech firms. The development of the banking industry did not reach this stage without collaboration between them. This will allow incumbents to set standards for future collaborations in order to enhance the possibilities for commercial exploitation of new technologies, for example blockchain technology.
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Sadiq Alesia is the Co-founder and Managing Director at Ashford & Alesseea. You can follow him on twitter @SadiqAlesia or contact him on [email protected].
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