“Fintech” banking business models and importance of risk management

Currently there is a lot of discussions whether banking industry is endangered by fin-tech start-ups. In last weeks we are noticing that P2P financing is losing a momentum and we see opinions that there is no major progress in blockchain industry. On the other hand Moven just published beta version of Android app, Apple Pay is still raising turnover, Venmo transaction numbers are still tremendously growing. Looks like that big tech companies will succeed, as other P2P and crowdfunding models will remain in short-term a niche market.

We believe that business models which are developing in fin-tech industry will gain on a basis of one of four key strategic competitive strengths:

  • user experience driven competitive strength — customer centric model
  • technology or process driven competitive strength — new technology model
  • cloud cost driven competitive strength — banking as a service model
  • risk management competitive strength — underwriting model

We tried to map quite a number of fin-tech companies and other products and services into a venn diagram in order to evaluate if such companies do have potential to surpass early stage of their life cycle. As nobody can doubt in their innovative potential, key problem for them is that clients in usage of banking services are conservative and innovative potential is not their key preference. Trust and stability are still important.

4-Circle Venn Diagram - Fintech business models

We are of opinion that development in directions of AI, Blockchain, Biometrics, Alternative scoring, … are just methods to improve processes, quality and service to a customer. It is true being first or not being is an imperative, specially for start-ups, however banks are adapting to developed solutions and are leveraging key strengths they possess: market share and productivity. Some banks for sure will not service changed millennium client’s needs adequately. Due that their perceived quality will decrease and will influence their profitability. But my opinion is that cornerstone of disruption and innovative potential on long-term will be risk management. How banks will be able to integrate statistically “six sigma” proper risk decisions with usage of AI, big data, crowdfunding and crowdsourcing, is a key opportunity, as this will give them an option to manage their margins better than others and will increase trust of those millenniums with higher income. In risk management banks possess competences which I doubt could be surpassed by fin-tech industry.

Risk Management Fintech future

If we review consumer stand point, we could say that for consumer a trend of decreasing fees from payment and other services will remain, firstly due to big-tech competition and secondly due to changes in regulation. Short-term pressure from start-ups will also be influential, but on long-term will not be a key factor. It will help to segment customers accordingly. Due that banks will need to find other sources of income. Will this source of income be gathered by integrating e-accounting, e-commerce, PFM or other horizontal integrations to support needs of their clients — time will show. Maybe BaaS services will enable additional income for some banks. But as clients will be able to choose among different banking approaches, we can say banking will remain, it will change, and majority of banks will prevail. However consumers will have ability to manage their privacy either in one bank or in distributed products and services across the world. So banks will have to adapt in a way that risk management approach to client will be developed both with building relationship that clients will use main account constantly within the bank to generate amounts of data and on the other hand will have to be able to gather client’s data from numerous products client will use in different regulations and among different digital identities. If trend will be that an average consumer will own number of digital identities (for different purposes), it will enable niche players to co-exists with banks on a long-term. And again, banks will have to understand consumer digital identities, their usage and misuse, will influence their risk management models in all types of risks. Banks with better insight to consumer privacy trends, consumer digital identities and risks rising from new behaviors will be able to develop better decision models and leverage current technological and social trends, like already mentioned with AI, biometric, big data and crowdsourcing. Such banks will be able to protect or further develop market standing.

If we look from business model approach, either from industry point of view or consumer point of view, we can be sure only of one thing, trust will remain to be the key element of banking. And trust is gained with long-term holistic and accurate risk management.

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