The banking and fintech community now widely view data as the new frontier of finance. The successful banks of tomorrow understand that the key to success lies in harnessing their massive amounts of customer data, and to successfully do this, they must collaborate with their agile counterparts, fintechs.
Steve Ellis, head of innovation at Wells Fargo identified fintech’s leading role in customer data analysis and that “there will be places where partnering with (fintechs) makes perfect sense.” Ruth Wandhofer, global head of regulatory and market strategy at Citibank, says that fintechs "should produce solutions around innovating bank data."
The third fintech wave: collaborative progress
The first wave, in the wake of the Global Financial Crisis, saw plucky challengers take on the traditional finance sector. The second saw banks take notice of fintech, responding through direct investment in fintech companies or with their own internal “innovation centres.”
Now, we are entering the third fintech wave, which will be characterised by collaboration between banks and challenger fintech companies. While banks would like to innovative on their own, their massive size and the colossal costs that they would surely need to bear make doing so a formidable, if not insurmountable task.
Similarly, despite the ambitious claims and desire on the part of fintechs to become financial entities of a similar standing to banks, it is just not realistic, at least for the foreseeable future.
Banks aren’t going anywhere. So, while both sides would probably prefer to do things differently, the reality is that through collaborating with each other, they both stand to win, and crucially, the finance sector will continue to evolve as a result of fintech-led disruption.
Banks have their size and deep pockets to count on. But they don’t have the agility and innovative approach to leveraging customer data that fintechs do. Likewise, a fintech might have the ability to mine such data, but without a large database to mine, such ability is of limited use.
If we bring both together, we have a perfect match. Masses of data provided by one entity (a bank) and the ability to harness it by another (a fintech) in order to understand customers better and therefore provide enhanced financial services. This is the future of finance and the banks that understand this will be well placed to benefit.
Why customer data will decide the future winners in finance
Understanding the customer is the key in an increasingly competitive sector. This
allows a company to respond through developing new products and services to meet these customer needs and wants.
Harnessing customer data was not historically of such importance to banks. The traditional finance sector has really only needed to address responding to such customer demands now due to a lack of historical competition and threat to market dominance from new challengers. Now however, because of fintech innovation, banks risk falling behind if they do not act.
Through particularly sophisticated data analysis, companies are able to predict what customers want, even if the customer doesn’t yet know that they want it. In finance, fintech companies have grown in number and many in size because they have been able to identify customer needs and wants, and they have been agile enough to respond accordingly with innovative financial products that give them an edge over traditional banks.
Fintechs: the key to big data analysis and predictive analytics
Fintech holds the key for banks in terms of understanding their customers, through innovative big data analysis and predictive analytics. This is largely due to disruptive fintech technology in machine learning and artificial intelligence.
New, innovative methods created and cultivated by fintechs could breathe new life into many of a bank’s core business segments through collaboration. These include the way banks assess an individual or business regarding credit scoring and lending; marketing, sales and customer retention; risk management; investment management; and digital communication.
It is quite simply a game-changer and the opportunity that collaboration represents to both fintechs and banks is too great and risky to pass up. The biggest challenge - some industry commentators would say existential challenge - facing the traditional finance sector right now lies in how to listen effectively to customers and respond accordingly. Fintechs already know how to do this, through agile use of big data analysis and predictive analytics.
It will be the banks with the most sophisticated data coupled with fintechs with the capabilities and knowhow to reach valuable insights from this data that will be primed for success in this new third fintech wave.