Regulation is not holding FinTech back

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There is sometimes a miss-conception that the regulatory burden is saving banks from FinTech. Bank representatives sometime hide behind the regulatory pressure arguing that the FinTech sector is interesting but not at all a threat to established banks. How wrong they can be.

The resources needed to coop with regulators seemingly never-ending requests for new and increased controls and reports will certainly stop some startups to grow beyond the entrepreneur’s and venture capitalists A-, B- and C-round of fund raising. But it will not stop new financial technology, new customer expectations, need for efficiency improvements amid product standardization and margin pressure and the need to change to adopt banking. I.e. what FinTech is all about.

FinTech is much more than startup companies founded by beard-headed entrepreneurs, typically building yet another payment solution, crowd funding platform, or another financial advisory tool. There are several transformational trends effecting not only banking but also most other industries. Take a step back and look at the bigger picture:

  • Online media, social communities and endless comparison services has empowered customers with similar or even more knowhow than many bankers. Time is running out when the well-dressed banker at his office greeted the humble and unsecure customer and having the upper hand in terms of knowhow of seemingly complexed financial products, processes and prices. To an increasing degree customers are well informed and requesting services, opening hours beyond mid-day office hours, multi-channel solutions, self-service possibilities and honesty in sales (that is often called advisory). Like almost every other industriy than banking. To most banks, an entire new service model is needed that include investments in service culture, supportive self-service IT tools and improved customer relationship tools. Banking is no longer solely on the terms of approval from senior executives but on the terms of the customers, number of likes in social media communities and brand perception.
  • Regulatory requirements are increasing and span from pure balance sheet requirements and risk control and reporting issues to requirements on how products and services are offered to clients. Some bankers argue that the regulatory pressure is simply too big for FinTechs but tend to forget that FinTech also include new technology much needed by the banks themselves. Amongst other banks need to invest in fewer but more customer friendly end-to-end processes and less complexed products to cope with the increased regulatory requirements.
  • Above knowledge transparency, increasingly streamlined products and processes and adding to that new service suppliers inevitably leads to commoditization of banking products, hence margin pressure. Banks is under pressure already to maintain current products, processes and IT-system but will not be able to avoid to invest heavily also in new staff, products, processes and technology to gain material efficiency improvements and volume growth to compensate for slimmer margins.

FinTech startups are noisy and good at marketing them self. Including the venture capitalists backing them up. It is their job. Some of them will succeed building and growing competitive companies while most will either fail or remain small and at best an interesting venture.

Due to lead-times being cultural, decision making and technical, the incumbent banks however need to start moving now investing in new service models, self-service channels and invest heavily in process and transaction efficiency. Being painful to some; cultural change geared relatively more than before towards retailing is also a must mid- to long-term. How boring isn’t that comparted to complex well-dressed banking? Not at all – with commoditized products and with standardized and automated processes on the inside; customer centricity, brand and multi-channel relationship on the outside is materially important and interesting if to build a sizeable, profitable and growing business.

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