Why It’s Important for Financial Services to Invest in Tech Companies

Where the financial services industry is concerned, the barbarians are not only at the gates; they have broken through.

Fintechs have reshaped banking, the primary reason the so-called “Old Guard” would do well to continue to invest in tech companies.

Traditional financial services have been plagued by scandal in recent years, notably the  Wells Fargo scandal, where some 3.5 million unauthorized retail accounts were opened between January 2009 and September 2016, due to lax controls and “bad actors” at Wells.

In addition there was the Equifax data breach, which according to the company’s release in September 2017 saw the information of some 143 million clients compromised, generating uncertainty and fear for consumers, as well as the need for beefed-up data security measures for companies dealing with sensitive consumer financial and personal information.

There have also been everyday issues with inflexible back-end systems, outdated customer service and human-intensive processes, all of which are addressed by today’s fintech companies as well.

Not coincidentally, financial services have become the least trusted industry according to the 2018 Edelman Trust Barometer, a measure by that public relations firm that results from sampling over 33,000 respondents across 28 countries.

The fintechs have rushed to fill the breach, with growing success. The top 10 publicly traded fintechs surpassed $100 billion in total market capitalization in June 2017, and that number has only continued to rise. Consumers and financial services companies alike, acknowledge that data security is critical to maintaining stable financial markets, and have little and shrinking tolerance for data breaches.

The fintech revolution has been fueled in no small part by smartphones, which have enabled customers easier, quicker access to their financial institutions via mobile apps. No longer is there any need to stand in line at a bank, and the need for a checkbook and even credit/debit cards, has steadily diminished as well. The ability to instantly pay for in-store and online purchases, with smartphones, has created the need for increasingly resilient security software, safeguarding consumers’ accounts and data from unscrupulous characters.

The other ways in which fintech has disrupted the financial services industry include:

  • Chatbots: natural language and machine learning software that streamlines interactions and can, in some cases, even provide investment advice.
  • Machine-learning and artificial intelligence for fraud detection: Data-aggregation platforms that can discern historical transaction patterns and validate real time transactions, much quicker than done previously with human intervention, thus creating operating efficiencies, and loss mitigation, at financial institutions implementing such systems.
  • Omni-channel banking and obsolescence of bank branches: There are very few banking services which still require a physical visit to the bank by the customer, due primarily to the prevalence of online apps and much smarter ATMs. Reuters predicts that 20 percent of the bank branches in the U.S. will close over the next five years. With the trajectory of development within the fintech sector, I feel that the Reuters number may be much lower than actual branch closures over the same time period.
  • Biometrics for stronger security: The methods vary. Could be the identification of vocal patterns, fingerprints or facial/iris recognition, but the end result is an extra layer of authentication, and greater peace of mind.
  • Blockchain for digital transactions: Cryptocurrencies, not for speculation but for digital security, serve as a highly secure and more efficient way to transact, and will become much more relevant across most industries in the not too distant future. Of all the innovations in the fintech sector, blockchain will likely be the most disruptive, especially on a global platform.

The fintech revolution figures to continue unabated, reshaping, and often times creating much higher enterprise valuations than traditional financial services companies. It would serve these traditional companies well, and help to support their valuations, and longevity, if they continue to invest in fintech, either by building or buying such technologies.

 

By | 2018-05-23T19:31:25+00:00 May 23rd, 2018|Blog|0 Comments