It is well-acknowledged that banks are conservative institutions, which, until now, has been an admired and respected trait. But the raise of so-called “FinTechs” (financial technology startups) has significantly shifted the way we perceive financial services today. It has created new demand and has had an enormous impact on our preferences in terms of financial services. Let’s face it, they changed. A lot. Did you ever wonder why?
Well, FinTechs are building products we did not know we needed. Crowdfunding? Peer-to- peer payments and lending? If we take a look at how things used to be, we would normally to go to a bank, chat with Mr. Smith in our favourite branch, make a withdrawal or deposit and move on. Today, we rarely visit banks and we do not know if Mr. Smith works there or not. Our interaction with the financial service providers has moved almost entirely into the digital sphere.
How did it happen?
Contrary to the traditional banks, FinTechs have the capacity to innovate quickly. They are agile and pretty much free from any legacy. But to get to the point they are at today, they needed to fill in the gaps and provided innovative solutions in the areas where banks were underperforming. They also targeted customer segments that could have been slightly overlooked by banks. For instance, they provided more opportunities for getting business loans for women. With a tad more of a customer-centric approach, FinTechs have created platforms suitable to meet the needs of new, more sophisticated Internet users. Convenience, ease of use, and simplicity are always on the FinTech agenda.
In recent years, FinTechs gradually built up their own position in the financial ecosystem. They enabled growth opportunities for numerous sectors, e.g. software, payments, mobile banking, data analytics, or algorithmic asset management systems. They not only showed customers how easy it can be to manage one’s money, but they significantly changed people’s expectations. More importantly, they gave access to personal and business funding to those who would not have had it otherwise. Getting secured business loans with bad credit suddenly became possible. So even though banks’ positions won’t be shaken up by a small FinTech startup, it could be undermined by the tech giants like Google or Apple. In contrast to the startups, they have established position, funds, resources, and customers.
Should that mixed environment of financial technology companies be somehow supported by the governments? It should, and here’s why.
The FinTech ecosystem is still fairly undefined. Banks for instance are strongly embedded in the regulatory net, whereas FinTechs not as much. This results in an unclear ground for competition. More importantly though, it puts those two entities on two different sides of the spectrum. Nurturing that ecosystem is thus difficult, and demands collaboration between governments, financial institutions, and entrepreneurs.
Since the financial sector is a strictly regulated environment, governments’ role and responsibilities are much more essential than in other sectors. They can help facilitate Bank-FinTech partnerships by deregulating areas such as copyright, and product registration or by simply offering tax breaks. Experts suggest that governments should create a regulatory sandbox, which would serve as an opportunity for FinTechs to test news ideas without being subjected to immediate regulations check. The UK government with the Financial Conduct Authority, has already created such a sandbox, and the Bank of England has established FinTech Accelerator. Similarly, Australian regulators got involved in the FinTech sphere by establishing the Australian Securities and Investments Commission (ASIC). ASIC engages in FinTech initiatives by providing physical hubs and co-working spaces or informal guidance to startups, to name a few. ASICS’s Innovation Hub is consistent with the Government’s deregulatory agenda – “Streamlining its engagement with the FinTech sector and removing red tape.”
Given the complexity of the sector, governments have to engage at some point. Either by acting as catalysts for innovation by working towards a better regulatory environment, or by defining business accelerators and offerings. And by promoting this ecosystem, governments have a significant power to take the market of financial services to the next level. Their involvement may certainly encourage bank competition, but more importantly it can lower banking costs for consumers and open up a wealth of possibilities for us, the consumers.