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The Future of Fintech

Fintech is fast becoming a global phenomenon, led by innovators and followed closely by academics, and now drawing the attention of regulators. Broadly, fintech is an umbrella term for innovative technology-enabled financial services and the business models that accompany those services. In simpler terms, fintech can be used to describe any innovation that relates to how businesses seek to improve the process, delivery, and use of financial services. While its impact to date has primarily been felt in developing economies like China and India (Ernst & Young 2017), it promises to force legacy financial institutions in developed economies to clarify their strategies, develop new capabilities, and transform their cultures.

Driven by what Gobble (2018) defines as digitalization and digitization, fintech is increasingly embedded in everyday economic transactions. Ernst & Young’s (2017) fintech adoption index showed that nearly one-third of the consumers in the 20 markets surveyed use at least two fintech services, and 84 percent of those surveyed were aware of fintech services. The innovation world has already recognized the potential of financial innovation, and the number, variety, and reach of fintech startups has risen in the last decade (KPMG 2018). Investment is growing too: Five years ago, the fintech industry attracted $12.2 billion in investment (Accenture 2016); in 2018, the top 250 fintech firms collectively raised more than $31.85 billion (CBInsights 2018). KPMG’s (2018) Fintech Pulse report stated that global fintech investment increased from $50.8 billion in 2017 to $111.8 billion in 2018, more than doubling, with an unprecedented number of deals through multiple channels.

Not surprisingly, academic interest in fintech has followed a similar trajectory (Gomber, Koch, and Siering 2017). Several journals have hosted special issues on the topic, including Journal of Management Information Systems’s “Financial Information Systems and the FinTech Revolution” (Gomber et al. 2018), International Journal of Entrepreneurship and Management’s “Innovation for Financial Services” (Mention, Torkkeli, and Huizingh 2012), and Philosophy and Technology’s “Towards a Philosophy of Financial Technologies” (Coeckelbergh, DuPont, and Reijers 2018). Some scholars have focused on categorizing fintech across dimensions (for instance, the degree of innovation, innovation object, and innovation scope), while others are attempting to develop a consensual definition for fintech. Moreover, whether fintech should be considered a product, a business model, or a mechanism to disrupt the industry and create competition remains an ongoing academic debate.

Whatever it is, fintech is here to stay, supported by emerging technologies such as artificial intelligence, blockchain, smart contracts, and machine learning, to name a few. However, the jury is still out on what the future of fintech will look like. The growing momentum is delivering double-edged consequences—modernizing financial architectures and catalyzing consumer and market behavior change while disrupting incumbent employers, service models, and regulatory structures (Nicoletti 2017).

Expanding technological affordances have changed the game. Fintech has previously grown on its promise to expand access to the financial system by providing services to traditionally unserved or underserved populations. But increasingly, the faster/cheaper/better service models offered by fintech startups are disrupting the incumbent banking system. Financial products that traditionally have been the exclusive domain of traditionally licensed credit institutions—payment services and loans, among others—are now offered by fintech firms (EBA 2017). These smaller, more agile companies support a greater diversity of products and providers; they promise greater portability of financial products that are now digitized, built on hybrid and cross-industry business models that allow them to access markets often closed to traditional banks and credit offerors. They also offer greater transparency and improved risk management, at least partly enabled by their ability to get instant customer feedback and use it to power real-time adjustments in the services they offer.

Entrenched financial institutions have been paying close attention to the fintech growth story. And they’re ready to move. The big banks have already poured money into the sector. Goldman Sachs, Citi, and JP Morgan Chase all hold significant investments in fintech offerings (CBInsights 2018). Increasingly, these investments have been strategic rather than focused on returns. Many are now seeking to adopt and internalize a startup mentality to access the energy of fintech for themselves. Embracing fintech intrapreneurship, firms like Goldman Sachs and JPMorgan Chase are organizing teams and individuals to develop and drive new initiatives through open innovation (Brunswicker and Chesbrough 2018) and exchanging knowledge with fintech startups and other stakeholders. For instance, JPMorgan adopted an Agile approach, first investing in payments startup LevelUp and then integrating the companies’ technologies to improve its existing Chase Pay system.

Despite the promises of the technology, fintech firms face some hard realities. Primarily, they struggle to present a clear value proposition for their service-based offerings and to understand users and product-market fit. Scaling up fintech relies on funding largely from venture capitalists, who demand unique, differentiated offerings that demonstrate a strong potential for scaling.

Complicating the value picture is the fact that financial services are one of the most regulated industries in the world and regulatory concerns have increased as technological integration has become more complex and more pervasive. Furthermore, because it serves new markets and offers financial tools to new populations, fintech often operates in spaces where regulatory guidance is limited. As a result, fintech companies have run afoul of regulators, sometimes spectacularly so. For instance, US startup Zenefits, which offered insurance solutions and at one stage was valued at $1 billion, was found by the Securities and Exchange Commission (SEC) to be using unlicensed brokers and underwriters to sell its products. Conversely, there have been instances where bitcoin innovators have been able to bypass SEC regulations and processes simply due to regulators’ lack of understanding of the emerging technology underlying their products and services. That challenge is accentuated by regulatory regimes that multiply across countries, states, and even regions.

It is not only regulators who often do not understand how fintech offerings work; fintech firms must battle broad misconceptions about the security and reliability of the data their products are built on. They must build relational and behavioral trust with consumers and partners and construct innovative intervention mechanisms to nurture desired behaviors (Bofondi and Gobbi 2017). Policymakers and researchers need to steer attention toward responsible innovations that consider the elements of embedded trust—demographic diversity, knowledge sharing, ambidextrous thinking, and collaborative culture.

Collaboration is a critical building block for the future of fintech. Without strategic collaboration, as much as 95 percent of fintech firms fail at the scale-up phase (Capgemini 2018). Primarily this is because fintech firms often fail to integrate and deploy solutions beyond regional and national regulatory boundaries and fail to target customers at key inflection points (Strange and Rampell 2016). Often fintech startups struggle to secure operating leverage, especially the significant upfront investment required to build intellectual property (Lee and Shin 2018). Acquiring early-stage funding for proof-of-concept development is an onerous barrier for many innovators. It’s exacerbated for fintechs because they often can’t showcase a proven business model and sometimes struggle to find the right market and determine the customer/user demographics that can deliver value.

Here, too, regulation can be a barrier. In developing their technological platforms, fintech startups need to test, configure, and design applications that integrate different and usually heterogeneous technologies. Testing through live simulations and realistic operating conditions is a vital part of the development process, but those tasks require strategic collaborations and a favorable regulatory environment (Zetzsche et al. 2017). This kind of testing has typically not been looked on favorably by regulators; traditionally, it would require a full licensing regime, which can kill a new fintech firm before it gets out of the starting box.

However, attitudes are shifting. Regulatory sandbox initiatives have emerged in a number of jurisdictions to provide a safe environment for early-stage fintech startups to conduct real-world market-reach and market-reaction testing without obtaining a full license (Dostov, Shoust, and Ryabkova 2017). In the last three years, since the United Kingdom’s regulatory sandbox opened its doors in 2016, more than 50 such initiatives have emerged globally. These tools help early-stage fintech ventures build the long-term experimentation capabilities that are essential to innovation and allow for validated learning through brief, looped iterations.

Regulatory sandboxes can play another critical role in the development of fintech. As more of these tools emerge, they can be designed to help create a cross-sectoral, startup-friendly, global fintech ecosystem. Ultimately, they can help to break down the current regionalism of the sector. Many, if not most, of the fintech references we relied on are regionalized, and no clear framework for comparative analysis has yet been developed.

The promise of fintech far outweighs the risks, at least in the medium to long term. Fintech innovations will only become more pervasive in everyday transactions as their adoption increases and more inclusive and open regulatory frameworks allow them to grow. Incumbent financial institutions have no choice now but to reconsider their strategic choices and markets, creating opportunities for strategic collaborations with fintech start-ups. A coherent and pragmatically grounded discussion between businesses, fintech entrepreneurs, and regulators in this direction should aim to discuss the evolution of fintech trends, analyze the changes in supply and value chains created by fintech offerings, and assess the impact of national regulatory processes on cross-border investment and innovation performance across markets.

Untangling the tension between regulatory requirements and consumer acceptance calls for a stronger focus on business model innovation (Arner, Barberis, and Buckley 2017). Practitioners and analysts operating at the intersection of technology, policy, and financial services have a particularly significant role to play. More effort is needed to develop compliance toolkits that will enable fintech startups to meet complex, cross-jurisdictional regulatory requirements. Opportunities abound for innovation managers to engage in dialogue with regulators and raise awareness of rapidly emerging technologies and the consequences they may have for market integrity, stability, and sustainability.

Fintechs also have something to offer regulators. As many are focused on developing more consumer-centric approaches, they are in many ways more in touch with the banking public and its needs. Knowledge sharing between regulators and fintech companies can enhance regulator awareness of consumer habits, behaviors, and desires. This awareness can then contribute to the construction of regulatory systems that help build consumer trust in fintech platforms. On the other hand, innovation managers can help regulators achieve their goals by integrating a behavioral insights approach in fintech innovations, maximizing their potential to create desired behavioral changes (Lockton, Harrison, and Stanton 2010).

Purposeful effort will be required from both entrepreneurs and regulators to shape the future of fintech and push it in a productive direction. Only through collaborative and open practices, cumulatively built on global fintech intelligence, can meaningful customization of tools and processes enable growth and scaling-up of fintech products, services, and approaches.

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