Fintech companies have demonstrated two things: with digital innovation, you can conquer considerable market space and reduce internal costs thanks to more efficient internal procedures. The only condition is to follow their teaching.
Digitization and Finance sector is a combination that is proving to have considerable potential.
This is what is said about FinTech, i.e. companies that offer financial services and products through the most advanced digital technologies. In other words, they represent the hi-tech version of the banking sector.
The rise of this type of activity can be traced back to 2008 at the height of the economic crisis that involved, among others, a number of banking institutions. Fintech presented itself as a smart, fast, and simple alternative to the slowness of the traditional banking sector. From the outset, the main services offered by FinTech start-ups concerned crowdfunding, asset management, peer-to-peer lending, current account management and control, and data collection.
These companies have shown a certain competitive aggressiveness, conquering increasingly significant market share to the detriment of traditional banks and presenting themselves as a credible alternative for the use of financial services.
In particular, 2018 proved to be a particularly successful year for the Fintech sector, which has shown remarkable results globally.
The data of an ascent
According to a study by KPMG, investments made in the first half of 2018 far exceeded those of 2017, thus confirming 2018 as a record year for the sector. In fact, investment increased by nearly $20 billion for a total of 845 transactions.
In addition, the average size of late-stage venture capital funding reached $25 million, compared to an annual average of $14 million in 2017. The same applies to early-stage operations, which have risen from an average of $5 million in 2017 to $9.2 million in mid-2018. To give you an overview, the 7,500 start-ups around the world have raised about $110 billion in operations and investments.
This shows, on the one hand, the increasing attention from international investors and, on the other hand, that the sector is no longer perceived as emerging, but on the contrary, represents a credible (and sometimes fearsome) competitor for old-style credit institutions.
The finance sector in Italy: adage but sustained
In Italy, too, the Fintech sector has experienced significant growth, albeit lower than that in other countries.
According to a report published by the Fintech and Insurtech Observatory of the Italian university, the Politecnico di Milano, Italy is “deploying sails.” It would appear that in 2018, about 11 million Italians have used at least one service provided by a Fintech company. In other words, one in four people have tried it and have been very satisfied.
Also in terms of investments, the situation seems very encouraging. In the last three years, Fintech start-ups in Italy would have raised about €25 billion, thus becoming competitive players in the financial sector.
This acquired importance has been further confirmed by “political” events. In 2018, the first Italian Fintech ”lobby” was born. It is called ItaliaFintech and brings together the main players in the sector.
The objectives of this organization are basically two:
- to further expand the market so as to facilitate the entry of new customers and make it easier and more immediate to understand and use the services offered;
- to facilitate and increase the dialog between institutions and traditional banks in order to channel the development of the market and transform the potential for growth into stable and consistent development trends.
It is interesting to analyze the composition of this “lobby”: 19 Fintech companies, most of which offer electronic payment services. Together, they represent a European portfolio of over 920,000 customers, 425,000 of which are in Italy.
The total capacity to collect investments amounts to approximately €253 million.
Therefore, Italy is showing movement in FinTech in a way that is encouraging and this allows us to be more optimistic.
For a long time, traditional banks have been distrustful of these new entrepreneurial businesses.
Victims of complex and expensive internal processes, banks have lagged far behind digital transformation, due in some degree to its difficulty in fully understanding the phenomenon, and considering it to be merely a passing fad.
Last but not least, the difficulty in finding the know-how to develop the necessary digital technologies quickly and relatively inexpensively has also slowed down banks’ embrace of the digital world. It is interesting to note that, according to the latest data, this gap is gradually closing.
This is evidenced by the fact that many banks have not only “broken down” their prejudices against Fintech, but have also understood that it is strategically necessary to ally (and sometimes acquire) some of these players in order to remain truly competitive.
Throughout the world, there are many examples of banking institutions who have begun to forge strategic business relationships with financial start-ups.
For example, the Spanish bank BBVA has made a series of significant investments in organizations like Holvi, which defines itself as a modern digital banking company suitable for freelancers and entrepreneurs, or Simple, which aims to provide simple, fast and intuitive services for managing savings and accounts, started in the US. The same has been done by Santander, who in recent years has launched a dedicated investment fund of about $100 million.
There are also a few examples in Italy.
Intesa San Paolo, Mediolanum, and Unicredit are just some of the groups in Italy that are approaching the world of digital in the finance sector or that have started long-term investment projects to develop a strategy of technological implementation, along with the lines of what Fintech has done in recent years.
But what are the most important lessons that banks have learned from financial start-ups in recent years?
The first lesson of FinTech: blockchain
The first lesson that traditional banks have learned from the encounter with Fintech is that digitization allows them to open new market windows, giving them the opportunity to offer their customers innovative and technologically advanced products and services.
An interesting example is Blockchain, a data collection and management system. It is the technology that allows the formation of a large database, structured in blocks that contain transactions and that are linked together in such a way that each transaction initiated on the network must be validated by the network itself through the analysis of each block. In other words, blockchain works as a kind of shared public register that stores assets and transactions on a peer-to-peer network.
Its function is to allow the management of all the collateral information to a transaction through cryptography between the participants of the network, which verify the package of information present in each block.
This, in a sense, makes them unchangeable.
The content of the blocks can be modified but only through an operation that will require the approval of the majority of the nodes of the network that will not have any impact on “historical” events: every modification leaves a trace on the path of the information itself.
For this reason, we can say that blockchain is a sort of decentralized ledger, which allows the exchange of information and values between private individuals in an absolutely safe way, because there is not just one “book,” but many copies and as many validators, which certify the authenticity of the transaction.
The advantages of this technology (even if on closer inspection it is rather limiting) are many.
- The first, rather intuitive, is to make payments faster for the customer since the banks can process requests for money transfer quickly and more accurately, simplifying some steps and while maintaining a high level of security.
- Secondly, the use of blockchain technology allows banks and customers to reduce operating costs because it actually reduces the number of intermediaries.
- In addition, since blockchain is based on a system in which every change that the transaction undergoes must be verified and approved by the entire network of nodes, it reduces the risk of the bank being involved in any disputes, since there is no automatic approval, but the manual collaboration of all validators who analyze the various changes of the transaction, step by step.
- Another interesting advantage of blockchain technology is smart contracts, a perfect tool to meet the needs of increasingly digital customers. Smart contracts, which existed as far back as the 1970s and were tested in the 1990s, make it possible to automatically ascertain the occurrence of certain conditions and to follow them up with certain consequences. In this way, the contract “self-checks” the clauses contained in it and if these correspond to the actual reference data, it can continue to facilitate the contract. Blockchain, did not create this product, but has provided a more effective and secure management system against the relevant information and values that can be the subject of the “smart contract.” Implementing this type of product thanks to such technology means opening up to new markets and increasing the number of potential customers who see their expectations of digitization met. Another advantage of this tool is that it makes it possible to streamline procedures for the disbursement of mortgages and loans or processes related to the transfer of ownership, reducing expenses for the bank. To give you an idea of the savings possible, consider that the United States and Europe could reduce the cost of procedures by $3-11 billion per year by adopting smart contracts.
The second lesson of FinTech: Big Data
Another element that banks can learn from Fintech to fully benefit from digitization is the use of Big Data.
Although they do not have the same technical skills, the major banking groups have a significant competitive advantage, which consists of the wealth of information available to them. In this sense, digitization and strategic partnerships with some digital start-ups can be the key to market success.
If you are able to develop a certain analytical capacity, perhaps with software that allows you to read, collect, and manage large amounts of data, not only can you integrate the data into your marketing strategies to anticipate customer requirements, the same data can be used across the board in risk management or support for investment decisions for example.
The third lesson of FinTech: the cloud
Significant competitive advantage can also arise from the digitized management of documents.
In this sense, the implementation of cloud technology (yet another teaching transmitted by Fintech companies), which has multiple advantages for traditional banking institutions, is strategic.
- The first of these is savings. By using shared assets, it is possible to increase the level of scalability of internal processes, avoiding in-house management and use of internal IT resources.
- The second advantage is the possibility of using cloud technology to offer innovative solutions. Thanks to its extreme flexibility, the cloud allows IT resources to be activated only when strictly necessary and according to pay-as-you-go models (i.e. paying only for the services used and for the time period when you use them).
- The cloud also guarantees high levels of security for document management. In the past, decentralized technology of this type was viewed with distrust, precisely because entrusting others with the “storage” of one’s documents raised questions of reliability.
In fact, cloud systems can count on much higher defensive measures than in-house systems.
The former, in fact, can count on optimized and always up to date security mechanisms thanks to major infrastructure investments. This means not only reducing the number of hacker attacks to which you may be subjected but also ensures greater business continuity, since the data is accessible even during downtime.
Digitization is a long and sometimes uneven path, but banks must take it, perhaps following the path of some pioneers who have opened the way. The examples given show that the finance sector has considerable potential that can only be achieved with an adequate digital transformation, both in terms of the market and in terms of operational savings.