According to a Mckinsey study done last year, nearly $23 billion of venture capital and growth equity has been deployed to fintech companies over the past five years globally, and this number is growing rapidly. Clearly financial innovation companies are coming of age.

Banks have traditionally been impenetrable and resistant to disruption, having and offering complex capabilities via a network of tightly controlled channels and institutions, regulation and distribution modes. At their technological best, IT departments within banks have offered a supporting role to banking, asset management, wealth management and trading functions usually in an internal environment that provides specific cadence and uplift to the involved parties. However, with the rise of digital currencies, wallets, payments, big data, platforms and networks, the landscape is fast changing.

While fintech companies that have targeted payment transactions has been a clear trend in the last wave of financial innovation, it is predicted that in the future the biggest gains will be made in "retail lending (which has revenues twice as large as payment transactions does across all segments) and retail savings and investments (with 15 percent of global revenues)."

A couple of factors are driving this trend:

  1. The financial crisis has eroded the average consumer's trust and confidence in the authority and authenticity of big name banks
  2. Explosion of mobile devices and applications is making redundant the advantages of physical touchpoint that banks have hitherto enjoyed. Today's devices offer the promise of personalization and speed like never before.
  3. As a consequence of 2 above, consumers are gravitating towards interacting with personalized financial advice and planning at the source and origination level like never before.
    According to the report, the winners in this ecosystem will be distinguished by the following salient features:
  4. Focus on scalable and cost-effective modes of customer acquisition
  5. Reduction in the cost to serve: many fintech lenders have up to a 400-basis-point cost advantage over banks because they have no physical-distribution costs
  6. Data driven innovation using big data and advanced analytics : from credit scoring to customer need and behavior prediction
  7. Segment specific propositions that cherry pick and create specific value with discipline and focus, particularly in millenials, small businesses and the underbanked.(For example, Wealthfront targets fee-averse millennials who favor automated software over human advisers. LendingHome targets motivated investment-property buyers looking for cost-effective mortgages with an accelerated cycle time. )
  8. Leverage existing infrastructure: For example, Lending Club’s credit supplier is Web Bank. PayPal’s merchant acquirer is Wells Fargo. Apple Pay with tokenization capabilities supplied by the payment networks, provides an enhanced digital-wallet experience in partnership with existing banks.
  9. Manage risk and regulation: The fintech players who build capabilities for anti-money laundering, compliance, credit related disparate impact and customer intelligence will be better positioned to succeed than those who don't.
    Finally, here are the broad themes banks should focus on as per the report, to ensure they stay relevant in the game:
  10. Use data driven insights and analytics holistically across the bank
  11. Create a well designed, segmented and integrated customer experience rather than use one-size-fits-all distribution
  12. Build digital marketing capabilities that equal e-commerce giants
  13. Aggressively mitigate the cost advantage of disrupters through radical simplification, process digitization and streamlining
  14. Rapidly leverage and deploy the next generation of technologies from mobile to agile to cloud
  15. Rethink legacy organizational structures and decision rights to support a digital environment.

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