2017 will be remembered as the year that technology and finance finally came to terms with each other.
While the hype may be dying, Fintech is now better positioned to change the industry in the coming year. That rock-and-roll band you loved as a kid lost its edge when your parents started singing along with the radio. Likewise Fintech is suddenly looking more mainstream and less rock-and-roll as every major financial institution jumps on the bandwagon.
There are two major reasons that the coming year will be seminal.
- First, this is the year that banks and startups truly recognize that they are better together.
- Second, the legacy core systems that have held back banks in recent years will become relics of the past after this year’s developments. (These relics may be with us for a while – but 2017 is the year they will be recognized for the vestiges that they have become.)
We know that global Fintech funding continues to grow. The $19 billion invested in 2015 will seem small when the numbers are calculated for this past year. (The running rate for 2016 was already at $15 billion by mid-August.) But it is not the growth in investment that will make 2017 important; it is the nature of the investment.
Most investment in the global Fintech space continues to be in independent startups, but in New York the money pouring into Fintech investment is being directed at collaborative ventures. The investment supporting the idea that banks and innovative startups can work together now represents 83% of all new investment. The bulk of this fresh investment is no longer coming from venture capitalists, but from financial institutions.
Banks have watched as Fintech startups have nibbled away at the edges of some of their more profitable business lines – offering investment advice, brokering mortgages, providing personal or student loans. In fact, virtually any product that did not require a banking charter and avoids capital requirements has been fair game for the newcomers.
While there have been a few breakout companies, many of the new generation of Fintech startups are still just promising ideas with venture capital on the balance sheets. These innovators are learning that, while customers may be willing to test a new app that delivers food or books theater tickets, it is a very different proposition to risk one’s finances on an untested newcomer.
The advantages of partnering with an established and reputable bank, with a sizeable customer base is obvious—perhaps not as exciting, but considerably more likely to succeed. The new bank-sponsored innovation incubators and the numerous accelerators focused on developing products specifically for banks support the idea that banks and startups are ready to work together. The investment flows confirm that 2017 is the year this change happens.
Financial institutions were early adopters of computer technology. However, being at the vanguard comes with a cost. By committing vast resources to technology that controls their core systems, banks have massive sunk costs in systems that were state-of-the-art when introduced twenty or thirty years ago.
Now those systems are perceived by many as severe liabilities. A recent study suggests that 70% of banks’ IT budgets go toward maintaining their existing legacy systems – their core operating platforms. With so much of their budget tied up on maintenance it has been hard for banks to remain competitive with startups building innovative solutions from scratch with no need to worry about interconnecting with existing platforms.
Recent leaps in mobile technology have been about providing customers convenient, seamless service with an intuitive interface – not an easy task. But newcomers like Moven in the U.S. and solarisBank in Germany are working to provide all the elements of a traditional bank, less the traditional bank.
Whether you call it bank-as-a service (BaaS), or bank as a platform (BaaP), the crux is that in the near future banks may be nothing more than collections of applications. These applications or Application Programming Interfaces (APIs) are pieces of software that will be written on open code and could ultimately eliminate the need for traditional core systems.
More simple, and infinitely more flexible, than the current patchwork of legacy systems common in most banks, this new approach is fast becoming reality. A UK company named 10x Future Technologies was launched in October by the former CEO of Barclays with the sole aim of modernizing bank back offices. The company is developing a cloud-based core banking system.
2017 will be the year that APIs and cloud platforms started the slow process of killing off traditional legacy systems.
Mark your calendar, you will want to remember when Fintech finally settled down and joined the grown-up world of banking.