In the ever-evolving world of finance, disruption is a challenge for fintech itself and not just for the banks.
Financial Technology is a big, growing sector. At the end of last year, Ernst & Young estimated the UK Fintech market to be worth £20 billion in annual revenue, with 18% of this revenue coming from ‘emergent’ fintech. Whilst financial technology seems to often be perceived as a new phenomenon it seems that, in reality, it is simply a continuation of the natural evolution of the financial services sector.
Financial technology – the use of software to deliver nancial services – is continuing to evolve as rapidly as the technology we possess is. Indeed, new technologies are consistently being developed to improve on traditional delivery mechanisms.
Nothing in this world is static. We are in a constant state of ux. Stock exchanges, with their origins in City of London coffee houses at the start of the 17th century, are now almost wholly digital. Complex investment and trading strategies can be deployed at the click of mouse, and we can build equity portfolios with commissions lower than £10 per trade.
One of the most recent, and most talked about developments in nancial technology, Peer-to-Peer Lending, now often referred to under the moniker of Marketplace Lending, is gaining huge traction. Whilst the sector seems that it is now undeniably here to stay, it is not without its threats.
The uptake of incumbents
One of the major threats facing the industry is the switching on of incumbent nancial organisations to the opportunities presented by leveraging technology to deliver services. The Santander ‘InnoVentures’ scheme provides funding to ntech startups in exchange for the ‘disruptive’ technology needed to streamline bank processes and ensure its continued relevance.
Goldman Sachs is actively hiring from the fintech sector and is planning to launch its own online lending platform in 2016. Hargreaves Lansdown, the UK online financial behemoth, has similar plans in the UK. How the pure marketplace platforms will be affected is yet to be seen. The best outcome is likely to be a significant additional challenge for upstarts to overcome, with a reduced potential ultimate market share.
It is the capital that the incumbents have to deploy that makes them such a threat. Yes, they are being stretched by capital adequacy requirements, but directing a fraction of their turnover to developing digital arms is still entirely possible if the desire to do so is there. If what we are experiencing is however a natural evolution of financial services, the question is, with all the resources available to them, how did the incumbents even let the alternative finance market develop?
Many leaders of alternative finance platforms used to work in traditional FS organisations, or otherwise larger companies. So the knowledge, and desire, to develop these technologies was there – it just wasn’t on the radar of the people at the top.
Leaders of large organisations face an intrinsic challenge when it comes to developing their business. Few are visionaries, instead having proven themselves within the company’s existing business model, and excelling at it. Because of this they are experts at what they do, but aren’t necessarily naturally inclined to start doing what they do differently.
Flux doesn’t just come in the form of the technology that we use; it comes in the form of management styles and organisational culture too. Leaders run the risk of becoming legacy systems themselves – like the technological infrastructure widely noted as hampering change in the banks. Listening to voices from across the organisation – which might be the most junior employees – to nurture both talent and new ideas is incredibly important. What if once a quarter, the CEO sat down with the brightest young talent from each division of its organisation to discuss their ideas? What if when they heard a good idea, they let them run with it within that organisation, giving them ownership (both in terms of an equity share of the siloed business, and in terms of direct management) and let them leverage the organisation’s existing expertise to deliver their vision?
Shareholders would need to agree to giving aware a share of new ideas to the individual who came up with the idea and the individual who came up with the idea would need to accept having a lesser stake than if they started the company themselves. Consequently, shareholders would own a share of something, which they wouldn’t otherwise, and the individual would be able to quickly scale and develop their idea. While this approach would contribute to an on-going culture of innovation within a business, it would also help to manage the risk of new ideas, which have the potential to take market share away from the business in future. At some point, as the financial services sector continues its ever-evolving cycle we, as disruptive businesses, will ultimately be disrupted too. If, however, we can foster this disruption within our own organisations, put greed to one side and give fair ownership to the owners of disruptive ideas then perhaps we can continue to be the drivers of change in this world, rather than falling prey to ourselves.
[author title=”David von Dadelszen” image=”http://thefintechtimes.com/wp-content/uploads/2015/12/David-Headshot-032.jpg”]UK Bond Network[/author]