How will your business leverage Financial Technology? Banking has been around for thousands of years, at least since the days of the Roman Empire. It’s an industry steeped in tradition, and the “right way” to do things is firmly set in stone. Or, it was – until the modern fintech (financial technology) industry started to disrupt banking significantly from 2008. Fintech companies are not steeped in tradition. Many of them are recent start-ups, created with the idea that new technologies can be used to do banking better. In the past decade, while traditional banks have continued to do things in the same old fashion, fintech companies have used technologies like AI and smartphones to make financial services faster, cheaper and more accessible to the public. That left traditional banks with two choices – get on board with the fintech revolution or get beaten. Banking has changed forever. The fintech industry is still getting started, but growth is accelerating. In the Middle East, analysts predict the number of startups launched and investments raised are set to double from 2018 to 2020. New fintech startups are at the heart of drives to improve regulations and innovate new services, such as a regional “Know Your Customer” data sharing consortium built on blockchain. If you are new to fintech or just want to know more, this post is for you. Read on for the story of fintech, how fintech is used today, and how you can take advantage of it. The birth of fintech: a perfect technology storm Fintech’s emergence was triggered by the global financial crisis of 2008, but it was further accelerated by the rise of smartphones, mobile data and the growing ubiquity of the Internet. After the crash, banks were hit by unprecedented penalties and new regulations. This took their focus away from innovating new services and towards self-preservation, i.e. dealing with all those fines and new rules. For technology entrepreneurs, this created an opportunity. iPhone had launched in 2007, Android in 2008. Consumers had readily accepted the idea of digital services they could access anywhere via apps. If there was a way to deliver financial services that way – a simple, low-cost, self-service way – then a new fintech startup could win customers away from the old banks while their backs were turned. The real disruption came because Fintechs were targeting the high margin Financial services that banks were providing, eating into the banks profits. How fintech changed everything Traditional banks soon began to look like lumbering dinosaurs compared to the wave of agile new fintech companies that were fast emerging. For the longest time, banks had relied on customer loyalty to retain clients. Banks were mostly alike, aside from their interest rates and fees. There was little reason for consumers or business customers to change banks once they’d picked one. Fintech changed that, and banks felt threatened. Almost every financial service was ripe for innovation through fintech, including… Business funding – Also based in Dubai, Beehive has created a peer-to-peer (p2p) platform that directly connects businesses to crowds of investors. Insurance – Innovators such as UAE-based Democrance are using fintech and partnerships to make insurance accessible to those in the region “who need it most but can afford it least” International money transfers – Dubai-founded Remitr, named one of the Middle East’s Top 50 fintech influencers, enables businesses to wire money much faster and more cheaply than before. This innovation combined with ease of use has created a digital financial services revolution. The Banks’ response: if you can’t beat ‘em, join ‘em The only way traditional banks could stay relevant was to get into fintech. 84% of banks have formed or are considering fintech partnerships or acquisitions today. Fintechs grow at high double if not triple digit revenues per annum, which makes them a rich target for traditional banks. Like many enterprises, today’s banks are also on digital transformation journeys. Acquiring or partnering with fintech companies is a smart way to compete and add value. Consultancy KPMG has called fintech partnerships “the digital future for banks”. There are many examples of how such partnerships can help banks to… Innovate new services – Banking group Emirates NBD has made “chatting with your bank… just as easy as chatting with your friends”. Its WhatsApp service allows customers to perform secure banking tasks with natural language, 24/7. Improve credit offerings through better data collection – in markets where citizens have “thin credit files”, fintech can expand credit history data collection so customers can access credit for the first time. This is helping to transform banking in the Middle East, including the UAE where banks had previously targeted only 25-30% of the population. Deliver better customer experiences – Research shows fintechs have set “new standards for innovation and customer experience” and provide a superior experience compared to traditional banks. Reach new markets – Microfinance companies are using fintech to help underprivileged clients access banking services. One of the Middle East’s first groups, Grameen-Jameel, has reached 2.4 million clients across Saudi Arabia, Jordan, Syria, Yemen, Lebanon and six other countries. 38% of banks are also focused on their own, in-house fintech innovations as a way of competing. Keeping fintech in-house enables banks to control data security – an issue that 40% of banks are concerned about when considering fintech partnerships. AI and blockchain: new stars of fintech New technologies will keep fueling innovation in fintech. Right now, AI (including machine learning) and blockchain are in focus. Blockchain is exciting because it offers a new way to conduct financial transactions – one that is cheap, secure and does not need to be managed by a bank. Many fintechs and banks are now using blockchain to make transactions faster and cheaper. For example, Accenture research finds blockchain could save investment banks US$12 billion per year. AI is just as important because it is helping financial institutions increase the value of their data. IDC predicts global banks will invest US$5.6 billion in AI this year, to innovate in areas such as… Algorithmic trading, where big data and machine learning predict the performance of investments based on data patterns Customer service, where AI chatbots are already reducing costs and delivering novel new experiences, Eva from Emirates NBD was one of the first in MENA. Reporting, where AI is now enabling bankers to simply ask for the reports they want by using natural language Data is the key to fintech success. Ready to discover it? There’s one common element among all of the fintech innovations mentioned in this post – digital data. Data is the raw material that fintech fashions into innovation. If your company has unique data and an interest in financial services, then you have the potential to use fintech to drive competitiveness. But you need to start by understanding your data, how to govern it and how to unleash its power. For companies in the Middle East exploring fintech, GBM offers an AI, Analytics and Data Discovery Workshop series to get you started. In these workshops our experts help you: Identify your fastest route to fintech ROI Understand what is possible with the data you currently have, be it an AI Chatbot to improve customer service or a new algorithm for credit risk prediction to drive business growth. Building your first models, using world class IBM Power Systems servers and IBM Flash Storage systems If you’d like to know how to get started on your Fintech journey, please get in touch with me at DCM@GBMME.COM.