It was on this date, July 11, in the year 1804 in Weehawken, New Jersey, that Alexander Hamilton, architect of the American financial system, met his fate at the hands of Aaron Burr. Some would argue that the financial services industry has changed very little since then. Change has some slowly to financial services, and innovation has proceeded at an evolutionary, some would say glacial, pace. That may be changing however. Recent decades have born witness to the introduction of technology solutions that have accelerated the transformation of consumer experience. Technological advancements such as the Automated Teller Machine (ATM), online banking and bill payment, and mobile banking have enhanced consumer experience in banking and payments, while alleviating costs, increasing convenience, and streamlining processes. The shock of the great recession, coupled with the emergence of new technology applications in self-service, online and mobile banking, machine learning, Big Data, and artificial intelligence (AI) may now be sowing the seeds of financial services disruption.
Fear of disruption is a growing concern for financial services firms. A 2018 executive survey found that nearly 80% of top executives feared that their firms were at risk of disruption and displacement from highly agile, data-driven competitors. Three quarters of the executive respondents represented the largest financial services firms. This rising fear of disruption and potential displacement can be attributed in part to the increasing threat of encroachment coming from the big tech giants – Amazon, Google, Facebook, and Apple. I explored this threat in a Forbes article written last fall, Financial Services Disruption: Gradually And Then Suddenly. There is a new and additional threat as well. As consumers grow to expect greater customization and personalization of their financial services experience, a new wave of innovators is opening up a more expansive vision for financial services. Much of the innovation in financial services these days is being driven by a new set of entrants — FinTech startups.
The Emergence of FinTech
FinTech (short for Financial Technology) can be characterized as the movement to bring transformative and disruptive innovation to financial services through the application of new and emerging technologies which address consumer needs through automation. Due to factors including consolidation in the financial services industry and regulatory constraints, financial services firms may find themselves constrained from being able to focus their energies on innovation initiatives. FinTech startups have the advantage of not being encumbered by legacy systems and processes. As a result, FinTech firms are generally able to move faster and develop solutions that compete directly with traditional methods of delivering financial services. With customer acquisition costs high, and regulatory hurdles to overcome, financial services firms are faced with a choice whether to build their own capabilities or seek out FinTech partners to help drive innovation initiatives. This opening has provided an opportunity for FinTech firms to provide new applications either directly to customers, or in partnership with large financial services institutions. Large institutions must consider how they can move quickly to address consumer needs in an industry on the cusp of change, either through partnerships, acquisition, or internal initiatives. Most firms are taking a hybrid approach.
Jean Donnelly is executive director of FinTech Sandbox, a non-profit innovation center that was established in Boston in March 2015 with the mission of bringing to market the latest technologies that will transform financial services. According to Ms. Donnelly, “FinTech Sandbox helps startups obtain critical data to build and test products. We have a network of over 37 data and infrastructure partners (and growing) who will give access to their premium products to startups we work with to develop and test their applications”. Ms. Donnelly continues, “We also help get the best solutions in front of our financial institution partners, to explore opportunities for partnership, proof of concept engagements, as well as investment opportunities”. Ms. Donnelly notes that sponsors of FinTech Sandox include leaders in market data, technology infrastructure, and financial services that seek to explore the innovative solutions that FinTech startups are developing. Among the sponsors of FinTech Sandbox are financial services stalwarts such as Fidelity Investments, Franklin Templeton, Thomson Reuters, and State Street Corporation. FinTech Sandbox is also collaborating with startup accelerators such as MassChallenge on a new initiative announced last week that will match later-stage FinTech startups with industry leaders. The initiative is intended to accelerate the development of products and service solutions that have the potential to transform financial services.
Innovation at the Edge
The current FinTech universe encompasses startup firms in addition to initiatives coming from within established financial services incumbents, many of whom have launched Innovation Centers or Excellence. Capital One has been an innovator in financial services for several decades based on the application of data-driven analytics. Cap One has operated a Big Data Lab for several years now as it seeks to continue to apply innovative technologies and approaches to its business. The maturity of FinTech initiatives vary. My colleague Tom Davenport and I have written about AI and machine learning solutions from incumbent firms including Morgan Stanley and Charles Schwab, both of whom have been at the forefront of data and AI-driven financial services innovation in recent years.