Why Financial Institutions need to rethink their business models.

In recent years the financial industry has experienced dramatic changes in its competitive environment. In a 2015 study from the Global Center for Digital Business Transformation the financial services industry ranks as the fourth industry on the potential for disruption. The study surveyed global leaders on their perception on the risk of being disrupted by digital business models. Surveyed leaders perceived that four out of ten companies will lose their top position on the industry board, and more than half of these leaders considered will lose it to companies from other industries or start-ups.

Today we see that this perceived threat has become a reality. On its 2017 FinTech adoption index, E&Y has showed that the global adoption of FinTech services has gained traction across the globe. The study shows that global adoption has grown from 16% in 2015 to 33% in 2017. The rise of a new type of consumer who wants to manage all aspects of their lives through digital channels has reached 64% of Fintech users.

FinTechs have targeted services that are traditionally offered by financial institutions like money transfers and payments, financial planning, savings and investments, borrowing and insurance. The adoption of these services is expected to grow considerably in future years as a new generations of consumers used to rapid technological adoption grows.

As it would be expected, emergent economies with higher population and economic growth like Brazil, China, India and México are leading the FintTech adoption rates having reached a 46% adoption. This is considerably higher than the 30% averaged by the rest of the surveyed countries.

So, what can traditional financial institutions do to differentiate themselves? That is a question that everyone is asking. I believe that in the following years we will continue to see the rise of innovation ecosystems, as well as a strong M&A activity. But is this the way to go? Transforming into digital economy is not a matter of acquiring new companies or investing in FinTech start-ups, of course this helps, but the underlying principles behind these strategies are not taking into consideration the digitalized consumer.

Let’s take as an example the case of China and India, the countries with highest FinTech adoption rate, 69% and 52% respectively. Cities and municipalities in these countries are encouraging the use of digital services with the purpose of becoming "cashless" cities. Ant Financial, Alibaba’s financial institution has recently announced an agreement with Tianjin municipality to create the first cashless city in North China.

In the case of China, the volume of mobile payments has grown from virtually zero in 2012 to five trillion USD in 2017. Technology businesses have added financial services to their service offerings, allowing users to pay virtually for anything such as games, cinema tickets, restaurants and providing financial services for national and international money transfers, wealth management, money transfer, insurance and credit rating at a considerable lower discount rate.

This has been possible though technologies that are embedded in social platforms with high adoption rate like Alipay and Wechat, accounting for 94% of total mobile payments in China. A big difference between these tech giants and traditional financial institutions is that they have integrated the financial technology to their e-commerce businesses, social platforms and streaming services. This has allowed them to make smart decisions, based on social interaction, consumption patterns and geo-localization, something that traditional financial institutions lack.

So were should financial institutions head? What is there for them other than digitization? In such a disruptive environment it is helpful to be environmentally aware, developing dynamic strategies and exploring a new set of services. Financial institutions need to become more agile, and for this, they will need to challenge their current business models and start exploring alliances outside their industry, building larger ecosystems that enables them to transform data into novel solutions for their clients. As Alibaba’s CEO Jack Ma says, financial institutions should start thinking in TechFin rather than FinTech.


The economist intelligence unit: The disruption of banking

World Economic Forum: The future of financial infrastructure

Global Center for digital business transformation: Digital Vortex Report 2015

EY FinTech Adoption Index 2017

Keiner Perkins internet trends 2017

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