Digitisation of Finance – The Next Chapter

Could the recent fall in FinTech valuations be good news?

The recent downturn of the economy has had a dire impact on valuation of tech companies across the globe. This effect has been extreme in the FinTech sector. According to the Financial Times almost half a trillion dollars has been wiped out in the valuation of FinTech listed in the US since 2020. The extremely positive valuations of the sector were actually supported by the Covid crisis as much of the market believed the pandemic would speed up the digitisation of the financial services industry. But the slowing down of the global economy, rising interest rates and growing inflation started painting a more sombre future of the FinTech sector. Some may interpret this as the market waking up to the fact that FinTech is a fad and that the digital transformation of finance is not about the transformation of an industry.

They could not be more wrong.

Banking and Financial services firms have long been reluctant (or unable) to make the most of the potential of digital technology. Banks and financial institutions worldwide are increasingly using digital technology to change. The first step in this change is what we can call the Adapt stage. Almost all banks across the globe have websites, many have also adapted some of their in-branch offering to the web, generating some real benefits treating the internet as a new channel and nothing more. Some of the banks have continued on this path and have decided to continue in their digital journey by providing new services that are complementary to their core offering thus moving to the next stage of digital transformation – Evolve.

This is when the real problems start – existing legacy products, processes and delivery capabilities prevent the banks from getting to the next stage of change – the Transform stage. This stage requires the bank to rethink, redefine and rebuild how it operates. Few organisations (not just banks) are able to completely transform on their own.

While the banks were dealing with these legacy barriers to the Transform stage, a number of smart individuals saw an opportunity to take business away from the banks taking advantage of their inertia. They were the FinTechs. Firms like PayPal, Wise, Klarna, Robinhood just to name a few, saw the opportunity of taking a slice of the banks’ business by building better ways to address customers’ financial needs using technology. The VCs, PE firms and even the public markets saw these players as the heirs of the banks – expecting them to quickly take on the banks and probably win. The rapid financial services digitisation brought about by covid seemed to be an explosive accelerant. The banks did fight back claiming that they would work with the FinTechs by investing and partnering with them – but this was a slow, painful and sometimes purely optical exercise.

At the end of 2021 and the beginning of 2022 the economies across the globe started to slow down. Banks seemed to be in a better position to benefit from this downturn than the sometimes undercapitalised FinTechs. This led many “experts” to declare that the FinTechs are overvalued and its natural consequence of market devaluation and down rounds. But this is not the end of the FinTech revolution just as the Dotcom crash of 2000 wasn’t the end of ecommerce.

In the coming months we will probably see the banks performing better than the FinTechs in a high interest rate and inflation economy. They are likely to use their newfound financial strength to target FinTechs as acquisition targets or investment partners. The FinTechs will find it hard to resist these calls.

But collaborations between incumbents and challengers are difficult. Trust between organisations that operate in fundamentally different ways is hard to create. Understanding how to communicate and to align not only goals but also processes, performance metrics and desired outcomes will require attention and care.

One of the more interesting business models resulting from this approach are the emerging Open Finance platforms, where Banks and FinTechs can seamlessly cooperate creating a range of services, capabilities and flexibility unthinkable just a few years ago.

Done right the Bank and FinTech cooperation can bring about benefits for many of the stakeholders:

• The incumbent banks would benefit from innovation developing better ways to serve their customers at lower costs and with shorter times to market.
• The challenger FinTechs would get access to new customers and markets.
• The customers of both the banks and the FinTechs will get better financial products and services.
• Regulators will get a better, more competitive and possibly less unstable market to supervise.

The only downside could be for the early investors into the FinTechs. These will have to accept decent returns on their investments and not the stratospheric valuations that last year seemed to suggest.

For a change – everyone could be a winner.

“Open Platforms create a virtuous cycle that brings together the competitive advantages of incumbents and new comers. This kind of ecosystems allow participants to interact with zero friction, democratizing access to the newest technology and leveraging the power of the cloud and of APIs. In fact, collaboration between Banks and Fintechs is emerging as the most effective route to innovation in banking and finance. At Fabrick, we have built an Open Finance Platform which connects cross-industry players and orchestrates Open Payments and Open Banking services to power the co-creation of enhanced customer journeys”

Paolo Zaccardi, CEO & Co-founder – Fabrick.

The author of this article is Alessandro Hatami, founding partner at Pacemakers.io. Previously, he held executive positions at Lloyds Banking Group, PayPal and GE Capital. Hatami is co-author “Reinventing Banking and Finance“, work recognized in 2022 by Investopedia as “Best Book on Banking”.