Robinhood v. Wall Street. From bitcoin to Ethereum. The buzzwords are everywhere and if you feel like you can’t keep up, you’re not alone. And trying to stay on top of every new fintech startup might be causing your head to spin.

There’s no doubt that the pace of change is dramatic and disruptive. But in fact, there’s nothing particularly mysterious about fintech, blockchain, or any of the other buzzwords getting thrown around.

The real challenge is identifying important trends and anticipating how they may impact your industry and your organization.

What is Fintech and Why Does It Matter?

Fintech is the application of technology to the financial world. If you’ve cashed a check from your phone or sent money to a friend via Venmo, you’ve seen fintech in action. Most of these types of applications build on existing technologies to make money matters easier and faster.

But some elements of fintech are starting to use cutting edge technologies such as blockchain and artificial intelligence (AI).

The word fintech conjures up an expansive list of agile startups threatening big banks and Wall Street. But it also refers to steps the financial services insiders are taking to stay competitive. And increasingly, the small startups have begun partnering with established industry giants.

In all these permutations, fintech—which can be powered by the most basic technologies such as the Internet and mobile apps, as well as the very advanced like blockchain and AI—has the potential to disrupt and revolutionize financial services. We already see rapid change in who accesses financial services and how they do it.

Important Trends to Watch in Fintech

Today’s challenge is identifying how to harness the changing landscape of fintech to the benefit of your business. Here are five important trends that may help you strategize your next move as you think about how fintech can—and will—impact your organization.

Bringing financial services to the unbanked and underbanked

Ultimately, the goal of fintech is to make financial services less expensive and more flexible per transaction. The greatest promise potentially lies in reaching the so-called unbanked and underbanked.

Unbanked individuals lack access to traditional brick-and-mortar banks due to poor or nonexistent infrastructure or government regulation. Underbanked refers to individuals who are not getting the financial services they need, usually because they are insufficiently profitable for traditional banks to serve them.

By pushing the transactional costs of financial services down, and relying entirely on digital access, fintech offers low-cost products and services that cater to these non-bank customers.

Bringing effective financial services to these individuals offers benefits to consumers and businesses alike. Fintechs that can enter this space successfully will reach a wide swath of new customers. But ensuring adequate financial services to unbanked and underbanked populations has the very real potential to have a positive impact on global poverty.

While the greatest opportunities may lie overseas, this is not just an issue for those interested in a global reach. According to a 2019 survey by FDIC, nearly one in five Americans is either unbanked or underbanked.

When it comes to the “tech” in fintech, think broadly

For many, the first image that comes to mind when hearing the word fintech is cryptocurrencies, or even AI-driven robo-advisors or chatbots. Yet, fintech is much more than that. In fact, the real advances in fintech—those with the most immediate impact—have been in existing technologies.

For instance, the development of application programming interfaces (APIs) sits behind many of the recent advances in mobile banking, payment processing, and peer-to-peer financial programs. APIs allow financial services companies, both incumbents and startups, to work with each other to offer new products and services.

Naturally, more advanced technologies do open up new possibilities. For instance, today’s AI chatbots utilize advanced natural language processing to better mimic human communication. They can now truly enhance the customer experience and are significantly better than the first unwieldy attempts.

But advances in AI have gone well beyond improving the customer experience.

Indeed, there are a number of fields in which AI companies introduce new and significant propositions in the financial services industry.

For example, AI-powered data collection and analysis enable comprehensive customer profiles in order to improve credit and risk assessment and minimize revenue loss. AI is also beginning to help streamline decision-making processes that have been notoriously difficult to automate due to existing data silos between and within financial services business units.

Successful innovation requires thinking beyond technology

It’s easy to get hung up on integrating the latest technologies. In fact, most successful fintechs today aren’t built on cutting edge technology. Instead, they have discovered how to leverage and amplify the advantages of existing technologies.

In other words, specific technologies (i.e. blockchain) are less important than matching the right technology to the current—or future—social change. Successful innovation comes from matching the right technology with the right demand, at the right time.

Thus, the disruption stemming from fintech is as much about social change as it is about technological change. The impact of technology lies in the product or service the technology has actually created and, most importantly, how that product or service is perceived, applied, and absorbed.

And successful innovation requires substance, not show

The rapid pace of change in society today—be it social, technological, or both—has created what appears to be an entrepreneur’s paradise, as demonstrated by the proliferation of fintech startups.

With that proliferation comes the competition for customers and capital. In the early days of fintech, startups could attract both by being the first to develop a mobile app, for instance, or even simply creating a smoother or more accessible customer experience than the competitor.

To stand out in the noise today, a successful innovator will increasingly require a clear and demonstrable path to monetization, without relying on sleek interfaces or showy gimmicks.

Investors are now more interested in the feasibility of the business models of various fintechs than just their technological prowess. Outside the world of finance, many technology firms owe their success to the right business models, coupled with the right processes and operations as well as targeting the right pain points that their customers face. The same logic applies to fintech companies.

The challenges ahead: implementation and regulation

The promise and excitement of new technologies like blockchain and AI are huge, and it’s easy to get excited. But realism is important too.

Implementation and integration of new technologies is slow and progress can be unsteady. Think three steps forward and two steps backward. This is especially true if you are trying to integrate with legacy systems.

As seen from today’s perspective, fintechs have been disruptive because they appear to have all the advantages. The reasons for this are well known: They are smaller and more flexible. They can offer financial services at significantly less cost because they have less overhead. And they don’t carry the burden of existing technological infrastructure.

Incumbents, on the other hand, often do not have such luxury. Many of them continue to struggle with IT infrastructures that are not only out of date but also layered with patches.

For the most part, fintechs have thus far escaped the heavy hand of regulation. Take, for example, cryptocurrencies-related startups. From minting to trading them, these startups face very light regulatory constraints. In contrast, traditional banks, particularly those serving retail customers, face huge compliance regulations and “know-your-customer” requirements.

As a result, “regtech” is now a very real movement. Leveraging new technologies such as AI, traditional banks can more cost-effectively meet regulatory requirements. Thus, the playing field between industry insiders and fintech innovators is slowly becoming—at least somewhat—more level.

What this means for you and your organization

Fintech offers a fascinating case study of a market infused with new technologies and unmet needs.

Titans are being challenged by newcomers. New and old technologies are being developed and adopted. And novel products offer new possibilities and replace outdated solutions.

In short, the fast-evolving fintech markets provide valuable lessons and insight not only to those who are thinking of working or starting a company in this exciting and dynamic industry, but also to those who are considering how to adopt technological change into their business, big or small.

 

Blog originally written for Harvard Division of Continuing Education