Challenges in the Financial Sector and FinTech Collaboration

Thomas Akkerman, Tim Annink, Hidde Van Oosten Slingeland

February 2017

Digital Disruption in the Financial Sector

Digital technologies have been entering and developing in industries for years. Most industries have embraced these advancements entirely and changed their business models accordingly. However, the traditional financial institutions remained conservative and were naive in adopting new technologies. The emergence of FinTech companies made the banking industry realize that new technologies and newly offered services are very important. Outdated IT systems and many regulations, such as capital requirements, are reasons why traditional banks are facing serious threats by FinTech companies.

Banking activities are inevitable and will not perish, but the way in which these services are facilitated will undergo rapid change. Roughly a decade after the financial crisis, traditional financial services companies are able to put their main focus on innovation, by means of increased investing in technology adoption and putting financial technology (FinTech) at the center of the organization (Filkorn, 2016). But for some of these institutions, their attempts to keep up with the already-occurred changes may come too late.

FinTech describes an industry that provides financial services through the use of technology and software, in order to compete with traditional financial institutions and intermediaries. FinTech organizations in this industry are able to succeed in meeting the customers? needs by providing the digital services that customers require, where traditional financial institutions are unable to deliver what the customer needs. FinTech companies generally create better tailored products through the exploitation of data analytics, deliver the service or product quicker and are able to do this at a lower operational cost. In addition, FinTech organizations are shaping the financial services industry from the inside out: by creating the technological infrastructure on which banks will have to depend in the future.

According to PricewaterhouseCoopers (2016), on average 20% of the entire financial services industry is at risk of being lost to FinTech companies in 2020. Recent growth figures confirm the serious threat to traditional financial services companies. The total global investment in FinTech companies was 25 billion dollars by 2016, a strong growth from the 12.2 billion dollars and 5.6 billion dollars in size for the years 2015 and 2014 respectively. There are several reasons why FinTech is able to reach these market levels and disrupt the financial industry. The traditional financial institutions are by nature conservative, take long to implement changes due to the bureaucracy and business culture, and are lacking tech savviness and knowledge. The same study also provides information that is in line with this statement, displaying that only 52% of the traditional Financial institutions have a mobile application and that 18% of them is still in the process of developing a mobile app. In addition, PricewaterhouseCoopers (2016) also states 57% of the Financial Services industry is unsure about how to respond to Blockchain technology, a key component of current Financial Services responsible for facilitating security in online activities and the foundation of the Bitcoin, a cryptocurrency. Based on these findings, there is an apparent, necessary need for traditional financial institutions to adapt.

Keeping up with the Transformation

The emergence of FinTech and the new technological breakthroughs lead to an interesting challenge: whether traditional banks can transform rapidly enough to survive in the near future. The size of traditional banks has always been their strength, but in the present time where new FinTech companies are developing, their size is now becoming their weakness. With significant overheads and complex corporate structures, traditional banks cannot keep up with the speed of new innovations. To successfully keep up with the transformation, it needs to be clear what the key requirements are from a future digital bank.

From a customer?s perspective, the bank should be able to offer a fully digital experience; enable mobile e-payment solutions, multi-currency accounts and foreign exchange services, biometric technology, and P2P payment and lending opportunities. These features will provide efficient and innovative solutions resulting in superior customer experiences. A customer requirement that is already advancing within the FinTech community, but is still developing among the traditional players.

From an investment perspective, the digital bank of the future should be able to grow the same balance sheet with a fraction of the full-time staff of a traditional bank. For example, Atom Bank in the UK will be able to run 5 billion dollars of total assets with 340 full time employees in the near future, compared to Metro Bank running the same size with 2,200 employees. To generate value, the digital bank can monetize digital payments, use artificial intelligence assisting in sales and banking products, ?Roboadvisory?, streamline multi channeling and consult smart big data.

From a bank?s perspective, it will have to transform into a crossover between technology and banking firm. The importance of legacy divisions such as Retail Banking, Business Banking, Risk Management, IT and Finance will shift towards IT and analytical methods divisions, where superiority in these divisions will determine its success in the digital era.

Expectations from this future digital bank are that it will be highly efficient, profitable and agile. It will focus on balance sheet optimization, comprehensive automation, digitization of the middle/back office, and heightened security, while using the most advanced cryptographic techniques. The infrastructure needs to be flexible enough to handle digital currencies such as Bitcoin and the bank needs to apply big data analytics to improve risk management and create a respectable customer experience (Lipton et al. 2016).

Banks will have to remain one step ahead of the rapidly changing financial sector, where many new companies are currently joining. Banks should implement technological innovations and digital trends in their strategy and business models to meet the above requirements in order for them to stay ahead of their competition. To overcome this lingering threat, banks can either choose to compete or collaborate.


Banks know FinTech imposes a threat to the system, but both parties see bigger opportunities in partnerships rather than competing with each other. Banks are constrained by their legacy technologies and conservatism while FinTech operates in a glistening new environment that performs faster and more efficient than banks. Collaboration with FinTech will provide revenue gain while accelerating technological access and innovation. Global investments in these technological start-up ventures have increased from 1.8 billion dollars in 2010 to 22.3 billion dollars in 2015, but FinTech realizes it will face regulation constraints that prevents them from scaling up by themselves. Partnering with the established banks will make them benefit from their large client database, expertise regarding risk management and provide access to sufficient capital and liquidity. The shift from competition to collaboration will continue as both parties realize they need to bridge these gaps to complement each other, but need to be aware of cultural and skill-set clashes. Choosing to collaborate with these young companies can make the difference in either losing market share when sticking with their old product-based sales approach and legacy operations or innovating and increasing customer experience by partnering with closely related business models that will outperform the current banking models (Skan et al. 2016).

Banks and FinTech companies realize that collaboration has many advantages that can result in innovative solutions and superior customer experiences. Most leading banks such as RBS, ING and Goldman Sachs have already partnered with FinTech companies. These banks provide Incubators and Innovation Studios where early-stage FinTech companies are being selected and offered a platform to develop cutting edge technology for the financial services sector (Currencycloud, 2016).

While startups are still confronted with the risks young companies usually face, high potential FinTechs that offer strategic or technological advances are selected and being mentored, coached and eventually helped in raising capital for further growth. JP Morgan and Deutsche Bank form teams with multiple FinTech companies to innovate and work towards the future. Another example is Wells Fargo that has opened a FinTech lab center where FinTech companies with established ideas or in need to further develop their ideas are brought together (Kapron et al. 2015). Selected firms for such innovation or accelerator programs need to show there is a market for their product or service, and will then be coupled to specific business units of these banks for collaboration. The banks usually offer working space internally to optimize development. Other forms of collaboration can be a direct investment in the FinTech company under a partnership agreement, invest in a FinTech-related venture capital fund or try out a partnership for a limited amount of time through a pilot. In return for providing assistance and guidance to FinTech companies, banks can take an equity share in such companies. This strategic partnering will bring together the best of both parties and optimize the growth potential as well as the client experience in the fast paced transforming financial industry.


The financial sector?s future roadmap, disrupted by young technological advanced start-ups which are offering revolutionizing customer experiences, known as FinTechs, is undergoing rapid change. Traditional financial institutions are at risk, as FinTech companies are eroding the core competitive advantages of traditional financial institutions. In the new digital age, these banks need to transform their legacy operations and conservatism to stay competitive or fear significant contraction of their current influence in the financial markets. The digital bank of the future needs to offer a fully digitalized customer experience, offer digital currency infrastructure, P2P lending, optimize multi channeling, be agile, efficient, and apply smart data analytics. FinTech is well on its way to offer such innovative solutions but face regulatory and capital constraints to fully scale up single-handedly. The bank has the advantage of having a large customer database, access to funding and has expertise regarding risk management. This paves the way for collaboration between the two parties that could synergize each other?s strengths rather than out competing each other. Traditional banks are offering accelerating programs, incubators, and innovation labs to offer a platform for young technological start-ups that will receive mentoring and funding to optimize growth opportunities in exchange for technological innovation. Through collaboration both sides will benefit and succeed in embracing the challenges of the fast transforming financial sector.


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