Technology has transformed the world around us, from the way we socialize to the way we do business, and this is particularly true for financial services. Fintech, or financial technology, companies are using emerging digital tools to enable transactions such as mobile payments, money transfers, loans, fundraising and even investing. They have turned traditional banking and financial institutions on their heads, providing clients with services that often are cheaper and quicker than ever before.
New opportunities
For small to medium-sized business owners, fintech innovation offers a number of opportunities to reduce costs and increase capacity. Many products and services can be bought off the shelf with the potential to add enterprise-level capabilities at an affordable price, lower the price of commodity services and help businesses break free from restrictive contracts.
For example, Square (founded by Twitter’s CEO Jack Dorsey) changed the game for card acceptance at point of sale. The platform includes a card reader that connects to a smartphone or tablet, enabling chip, PIN or contactless transactions – a boon for small to medium-sized businesses on the hook for fees with every digital sale.
Choices, choices, choices
Some fintech companies compete directly against traditional financial institutions by providing similar services without high fees or contracts. Others focus on partnering with existing banks and institutions to streamline processes and improve service efficiency.
Fintech offerings can be split in three main groups: incumbents (banks/credit unions), stand-alone or collaborative with banks. Which should you choose?
Incumbents
With incumbents such as banks or credit unions, you know the institution is regulated, its deposits protected by provincial and federal laws. These relationships tend to be most straightforward. However, as established institutions, they tend to have higher fees and can be slow to change or introduce new services.
Despite being perceived as complacent, big banks in Canada are each planning to spend $300 million to $500 million on technology in the next five years, much of it on innovation. The question remains, however, if they can change fast enough, given consumers’ growing demand for mobile services. And is their business model flexible enough to compete?
Stand-alone
Fintech companies own the disruptive technologies and have the potential to grab $4.7 billion in revenue from traditional financial services, according to Goldman Sachs. They are fast, nimble and responsive, with a low-cost model that offers innovative pricing as well as services. Fintech companies also generally recognize the value of a portfolio approach to integrating technology.
However, fintechs are unregulated, funds deposited with them are not protected, and their privacy and security issues vary wildly. As well, just like any startup, they might not be accountable and could go under quickly.
Collaborative model
This is seen by some as the best of both worlds, providing both the stability of an established financial service and the nimbleness of fintech – if the model works.
In a successful collaborative model, the incumbent will have performed extensive due diligence on the fintech partner to ensure its product is tried, tested and reliable. The technology may just be a hedge or small bet by the incumbent but still deliver value to the customer.
What’s ahead
While many things are uncertain, you can bank on the age of one-stop shopping for financial services being over. More than $23 billion of venture and growth equity have been deployed to fintech over the last five years, with an additional $150 billion headed toward the industry by 2022, according to Entrepreneur magazine.
Regulators are also getting on board. The European Union’s Payments Service Directive 2 (PSD2) mandates open access to customer bank data (with permission). This promises to open the market up even further, especially if Canadian regulators get on board.
What you need to know
As with any new technology asset, businesses need to have a strategy before diving in.
Cost is only one element of the plan. Do you want to move all of your business away from conventional banks, or just certain parts of your business? How do you build a constellation of services that work well together? Here are other things to consider:
· How will payments flow? What about delays or impact on cash positions?
· What about impact on lines of credit and multi-line discounts?
· What about security and privacy?
· How stable is the fintech provider? Who is backing or partnering with them?
Before investing in a new relationship, get advice from advisers who not only know about fintech but have experience working with it. Don’t be afraid to ask for credentials and references.
Conclusion
Fintechs may have small market share today, but they are generating new and exciting products and services for small and medium-sized enterprises. Be sure to treat these opportunities as a strategic sourcing decision to balance capabilities, cost and risk. And, whatever direction you go, you likely still need to maintain a strong relationship with your primary financial institution.
Contact Doug Macdonald
MNP Regional Financial Services Leader
T: 647.220.1086
E: [email protected]
