Fintechs: what are they and how to face them?

Understand what fintechs are, what their influences on the market, why they are an opportunity for your business and how to prepare for this new era!

Fintechs are startups where technology is applied in financial services or used to help companies manage the financial aspects of their business, including new software and apps, processes and business models.

Fintechs are a new business model in the financial industry, and they are revolutionizing it. In Brazil and in the world.

Throughout this article, you will deepen this concept and understand why fintechs are a watershed in a sector so consolidated in world capitalism.

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What are fintechs and what is their influence on the market?

Term appeared from the junction of financial technology Abbreviation, Fintech is a generic term for any kind of technological innovation used to support or provide financial services. As we have said, it also describes the startups working in this new configuration.

But do not think that fintechs are something very new. After the global financial crisis of 2008, the innovations around the financial industry have made the concept evolved to create alternatives and reform trade, payments, investments, asset management, insurance, clearing and securities settlement and even money itself with cryptocurrency like Bitcoin.

In just a few years, FinTech companies have defined the direction, form, and pace of change in almost all financial services sub-sector.

And it fully in line with the digital transformation that the world (corporate or not) has experienced. Consumers now expect seamless digital integration, quick loan approvals and free payments from person to person – all innovations that fintechs become popular.

Why are fintechs gaining more and more market?

It is essential to know that fintechs are creating many changes in the financial industry and giving rise to a number of new business models, apps, processes and products.

All financial service providers are increasingly dependent on technology, but fintechs place  innovation-oriented technology at the heart of their business activities. They can be particularly active in areas such as new payment systems or automated investment advice.

The explosion of e-commerce has created a healthy ecosystem of beginner technology suppliers for financial services, retail, and other industries. In the last decade, the fintech ecosystem has grown from just over 10 key participants in the United States to thousands of startups around the world.

What opportunities do traditional institutions have with fintechs?

While cautious, banks are quick to adopt technologies that can create new revenue streams or generate efficiencies. Therefore, they sought help to integrate new technologies such as peer-to-peer payments on their huge legacy infrastructure.

Although many banking institutions are developing their own technologies, increasingly, they are also realizing that partnering with startups fintechs is a good choice.

For example, online mortgage services platforms saw an increase in adoption by banks for processing customer accounts.

Traditional banks, despite their economic power, know that Fintech’s greatest asset is the mindset of innovation, agility (speed of adjustment), a consumer-centric perspective and an infrastructure born in the digital environment.

Therefore, we can say that the advantages of the partnership between traditional financial industry organizations and fintechs are:

• cost reduction;
• gain technological intelligence;
• innovation and market differentiation;
• better service of ultra-connected consumer cravings;
• increased profitability through digital and automated services – no need for human intervention and error-free, etc.

To sum up, the most successful Fintechs have focused on narrow functions or segments that are underserved by traditional financial institutions but struggling to grow profitably on their own. Traditional financial institutions have a vast customer base and deep pockets, but with legacy systems that retain them. Therefore, joining forces is the best choice.

Collaboration is a natural way for banks and Fintechs to leverage each other’s strengths, although culture is always a challenge when a nimble innovator joins a more conservative trader.

Perhaps a more successful approach would be some Fintech products or partner with them to create news and thus recruit their next generation customers. Perhaps a more successful approach would be fintech products distributed by banks or partnering among them to create novelties and thus recruit their next generation customers.

How can traditional financial institutions prepare for ‘fintechization’ era?

There are already experts pointing to a scenario where the so-called “fintechization” is a no-return path. In this movement, financial institutions must invest in the menu of digital services, mobiles, omnichannel (multi-channel), agile methodologies, user-centric/people-first strategies (solutions and super adherent services to users) and Data Science.

The future of the banking industry will depend on its ability to leverage the power of customer insight, advanced analytics, and digital technology to deliver services that help consumers manage their finances and their lives around money. Also the internal process management skills will depend on disruptive technologies.

Preparation for the “fintech revolution” must be strategic so that traditional financial services don’t become obsolete

For this, we must begin with an internal revolution. Investments in Open Innovation are quite indicated.

Open Innovation, also called Corporate Ventures, is a method of external collaboration. It allows traditional institutions to promote ideas, research and open processes to develop innovative solutions. The concept is to garner expertise and knowledge to solve business challenges outside the organization’s boundaries.

For example, from the opening of APIs to the public, it is possible for third parties – Fintechs, startups or technology companies – to collaborate with banks to develop solutions and applications for these financial institutions.

In this way, the financial institution ceases to exist only in its own domains and begins to have contact with its client in other digital spaces, expanding its performance, public, service portfolio and contact time.

The bank’s open API platform must be able to connect the account holder, and more specifically the account information, to the other platforms of your choice. The power of choice is the user, the data connection is the financial institution.

→ Read more: Open Banking: what it is, how it works and why invest ASAP!

How can traditional financial institutions approach fintechs to partner?

The approach of banks and other traditional financial industry operators with fintechs is not always easy. For this, a suggestion is to seek help from consultants specializing in making this bridge.

MJV created its Digital Transformation Laboratory with an emphasis on Open Innovation in one of the most important universities in the country, UFRJ. Our laboratory fosters consulting projects based on real demands from markets and clients.

We act as an important “hub” for connecting large corporations, SMEs, startups, teaching units and research centers of UFRJ, through its specialists, researchers, teachers and students, focusing on the development of new digital businesses and promoting digital transformation.

Are you prepared to deal with fintechs making them partners and non-competitors of your business? Get deeper into this subject by downloading the e-book Open Banking – Financial Industry Biggest Transformation!