Compete or Partner: Banks See Rise of FinTech Solutions
By Christopher Kennedy, VP-Quantitative Finance Manager, BankUnited [NYSE:BKU]
Fintech or simply financial technology—is moving at the speed of innovation. FinTech originally represented the shift of traditional brick-and-mortar banking to online and mobile platforms. Now, FinTech embodies a deluge of Silicon Valley startups reinventing the way we think of banking by seamlessly weaving financial services into our digital lives. Unencumbered by legacy systems, FinTech is built from the ground up using modern technology. The intersection of cloud computing, big data, artificial intelligence, and blockchain creates an effortless relationship with our finances.
Cloud computing brings ideas to solutions within weeks, shattering barriers to entry in financial services. With the rapid development and the ability to scale computing needs on demand, cloud computing makes deploying an application, service, or a blockchain database as simple as the click of a button. Embedded in this infrastructure service are seamless data integration that enables the very-high-speed realization of big data analytics, machine-learning, AI, and blockchain solutions; cloud computing is the power plant for speed and innovation that drives FinTech solutions.
Big data is wielded by FinTech firms as part of their strategic arsenal to enable rapid analytics and decision-making. Loan origination is a perfect example of a traditionally timely process that can be enhanced by FinTech firms using big data. By leveraging big data, such as public information and records on a cloud computing platform with AI and machine learning, FinTech firms can make instantaneous decisions and recommendations. Only the critical inputs that can’t be retrieved through software needs to be entered by users, speeding up origination and approval from weeks to minutes.
AI and Machine Learning drive rapid innovation, insight, and business decision-making. What would take a teams of humans to complete can now be intelligently driven through guided learning, neural networks, and other technologies. When sitting on a cloud-computing platform and hooked into big data, FinTech firms can provide instant, intelligent, recommendations and analysis. A recent example, J.P. Morgan’s COIN software recently applied machine-learning to their loan document review, completing 360,000 hours of legal and loan review work in seconds. AI is making the sheer speed of innovation and development for FinTech firms possible.
Unencumbered by legacy systems, FinTech is built from the ground up using modern technology
Blockchain is a distributed database using peer-to-peer networks in combination with cryptography. A key ingredient of initial FinTech excitement, blockchain technology enabled Bitcoin, Ethereum, Quorum, Ripple, and other distributed financial technologies to grow rapidly in the last few years. This expansion has been accelerated by Blockchain 2.0 using smart contracts that link transactions to software application code, leading to RegTech, WealthTech, and other distributed technologies. This democratization of information and applications can increase the stability and reliability of platforms built on this technology.
Banks Endure by Emulating and Cooperating
Banks are enduring by choosing between partnership, pure-play, and hybrid strategies to engage with FinTech firms. Banks that chose to do nothing are in fact choosing to compete.
Regions Financial—a Partnership Strategy
Regions Financial has been exhibiting a partnership strategy with at least one partnership per year since 2014. In 2014, Regions is one of many banks to have partnered with GreenSky, an online consumer credit approval pipeline between consumers and lenders. They have continued year-over-year with Fundation for online business loans in 2015 and Avant in 2016 for same/next day personal loans lending. The theme in these partnerships is the simple, rapid process, deployed quickly with advanced analytics such as machine-learning and AI, with a seamless user experience.
J.P. Morgan—a Near Pure-Play Strategy
J.P. Morgan is developing an internal army of talent to compete with FinTech firms, positioning itself as a market-maker for FinTech as a pure-play. Some of their initiatives include COIN (Contract Intelligence) a machine learning tool which can save 360,000 hours per year, Quorum, their private answer to Ethereum for blockchain enterprise transactions, and their partnership with On Deck Capital for small business loans. A large spender in technology ($9.5 B in 2016), J.P. Morgan is engaging in a FinTech strategy.
Other Examples of FinTech Integration and Partnership
Other banks and firms are testing and growing their Fintech platforms and ingredients of modern FinTech firms. Morgan Stanley recently added AI support to their trading staff, and RBS launched a FinTech hub and has partnered with FreeAgent. FinTech tools such as Big Data, the Cloud, and Machine-Learning is now the expectation of businesses and consumers to support the modern user experience.
Taulia—a FinTech Partner and Disruptor
Why should private firms hold commercial deposits at banks when they can instead internally manage their cash using FinTech solutions such as Taulia? Attracting large firms such as Coca-Cola, Taulia enables private firms services for accounts receivables, payables, supply-chain lending, and supply-chain optimization, enabling smart deployment of capital without necessarily needing to hold as much cash in deposits. Traditionally an area where banks would often intermediate, Taulia is one strong example that may challenge this niche for banks and begin to challenge bank’s balance sheets.
Where to Go from Here
FinTech solutions will continue to rapidly develop solutions—Banks must consider their strategy in this new world. With the ease of deployment with cloud-computing and the power offered by Big Data plus AI, partners and disruptors will continue to emerge quickly. Additionally, blockchain continues to evolve into new and larger roles in the financial services space with smart contracts. Will banks choose to compete, or will they choose to form partnerships?