The Three Waves of FinTech

Fintech innovation is transforming financial services, but the nature of Fintech itself is changing too. According to Jeff Gido, Goldman Sachs’ Global Head of Fintech in investment banking, the evolution of Fintech can be viewed across three ‘waves’ and the current wave is thought to be the second. The distinction between each wave is centred around the type of attitude that traditional banks and Fintechs have towards each other and their relationship as either rivals or colleagues.

First wave: emerging disruptors

The first wave of Fintech began after the 2008 financial crash as a response to a banking industry in crisis. After the recession, new regulations and changing consumer demands created a new financial landscape and drove big investments, allowing Fintechs to thrive. Because of new laws, certain types of business were much less profitable for banks, creating an opening for Fintechs to fill with technology such as lending apps. Big data, cloud computing and growing wireless usage also made it easier for startups to gain traction, while changing consumer habits, such as increased usage of mobile services over physical branches, added to this advantage. Initially, these startups sought to create disruptive change and unseat banks from their position of power. However, despite the problems caused by the financial crisis, banks turned out to be far too large and established to be completely overthrown.

Second wave: increased collaboration

Many people think we are now experiencing the second wave of Fintech. Although big, established banks are taking notice of the changing financial landscape and doing what they can to remain competitive, they are unable to match the agility of startups. Although many incumbents have begun to launch services to compete with startups, such as online and mobile banking, they are simply responding to Fintech innovation rather than innovating themselves. For this reason, banks have started to work with Fintechs and many financial institutions now sponsor ‘innovation centres’ to foster the startup mentality. This second wave was the beginning of banks working with Fintechs through innovation labs, accelerators and hackathons.

Third wave: the future of bank-Fintech relationships

This third wave of Fintech is focused on partnerships between banks and Fintechs as equals, with 87% of business in Financial Services believing that Fintech will play a leading or major role in informing their near-term strategy. Startups are now beginning to partner with established players in the industry, taking advantage of the large and loyal customer bases and distribution networks that financial institutions have already built. In return, Fintechs can offer up their own innovative technology to provide a better customer experience at lower operating costs.

Whether you believe we are currently in the second wave of fintech or entering the third, it’s important to remember that not all Fintechs collaborate with banks in the same way. For example, by reducing the risk and cost to banks of outsourcing part of their value chain to Fintechs, the Cutover platform helps financial organisations to become more agile, making it easier for them to participate in the ‘third wave’ way of working with Fintechs. Traditional processes in financial services, which are based around large, rigid infrastructures, would have made it impossible for banks to offer new services supplied by Fintechs that deal with things like payments and P2P loans. Now, there is a shift towards microservices, meaning that banks can outsource parts of their value chain for short amounts of time, with Cutover helping to make this process easier and more sustainable.

We believe that financial services companies that leverage technology to the best effect will be the most successful in the future. Similarly, the Fintechs that work with these banks to improve their existing systems and services are likely to be the ones that thrive.

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