Fintech Technology as Critical Success Factor
Fintech, financial technology, has considerably evolved in recent years. Startups challenge established financial players with innovative, often also disruptive, services and products. On the other hand, these established companies try to save their business models with innovations. How important are the technologies used in the process? What strategies do the providers pursue in this regard?
Favored by sinking technology costs and consumers' increasing digital maturity, startups in the financial technology area have brought to market a wide variety of innovative services. Well-established financial service providers increasingly also present their own fintech offers. Corresponding to finance-related needs, fintech includes a broad range of services and products. Activity is not only on a high level internationally but also in Switzerland, where a dynamic fintech ecosystem with over 100 fintech companies (1) has emerged.
Technology as enabler
The decisive enabler for new business models is technology. This is true for fintech startups, but also for fintech projects of established financial service providers which increasingly use IT as the critical success factor. What technological strategies do fintech vendors pursue, and on which technologies do they base their business cases?
We identify the following six fundamental technologies as enablers for fintech services:
- Cryptography is the basis for blockchain technology. It is used to develop, e.g., cryptographic currencies such as Bitcoin and real-time transaction systems. Instead of relying on a central entity, you put your trust on a distributed, quasi-democratic process. The technology offers high speed coupled with high security and low costs.
- Mobility technology at the end-user's side is present in tablets, smartphones and smartwatches, but also for merchants in the form of specific hardware, such as card readers supplemented by the installed apps. Mobility enables personal, user-friendly, rapid (instant-on), time- and location-independent use of resources. Typical applications are mobile payment, mobile point of sale (e.g., Square, iZettle) and mobile banking.
- With Big Data Analytics you can analyze financial data but also, e.g., user behavior. As an added value you can create decision support, simulations, predictions and optimization proposals, e.g., for a banking advice by a robo-advisor. Thus, you can often reduce personnel costs. Big data analytics is used, e.g., by Dataminr (data mining, usable for fintech) and 8 Now! (autom. asset allocation).
- With Social Platform technology you can network individuals and groups on a large scale. This enables P2P and crowdsourcing applications. The benefit consists in bringing together various parties as well as economies of scale (social scaling), but also distributing risk. In addition, you can gain networked information. The platforms can also be the source for big data. Examples of users are: Advanon (invoice financing), Lending Club (loans), Crowdhouse (real estate), Ayondo and wikifolio (social trading platforms).
- Automation enables fast and cheap settlement of formal processes up to automated analysis and suggestions (e.g., robo advisor). This allows offers in the area of low-margin volume business in connection with self-service. Examples are Foundbase (investment), Crowdhouse (real estate) and TawiPay (money transfer optimization).
- Thanks to Direct Channel technology providers can make direct contact with end customers and bypass the middlemen. They can save time and money, exchange information with the end customer and possibly also offer them self-service. Examples are mobile payment solutions such as Muume, Twint or Paymit and money transfer providers such as TransferWise and Monetas.
Switzerland and international: similar picture
- (Image: AdNovum)
Now, which of these technologies do prevail how in the fintech market? We have investigated two sets of successful fintech companies. The international view is represented by the Fintech Unicorn List of Finovate with 33 companies valued at over 1 billion USD (May 2015) (2), Switzerland by the 10 selected participants of the Swiss FinTech Pitch.
Fintech vendors often base their business cases on several of these technologies, mostly combining two or three of them. This is evident in the Unicorn List as well as with the participants of the Swiss FinTech Pitch.
New business models, established enablers
- (Image: AdNovum)
The Unicorns' currently most important enabler technologies prove to be automation and direct channel. They are twice as often key enablers than social platform technologies. Not very surprisingly so, both offer a high potential for cost reduction. Big data analytics and mobility are only about one third as relevant as the favorites. There is no company with a cryptology business case yet in the Unicorn List. This may be because it needs highly specialized knowledge, and the risk is still considered too high by the market. The evaluation for the participants of the Swiss FinTech Pitch shows a similar distribution. Although fintech companies launch innovative, sometimes disruptive business cases, they rely mainly on proven technologies. This applies at least for the considered samples of the most successful fintech companies.
The role of IT
Innovative, often disruptive fintech business models are only possible by means of IT. Because IT provides, besides commodities such as connectivity, security, computing power and storage, also the enabler technologies for the business cases. This makes fintech appealing for IT, as IT can contribute its experience with proven technologies, and its expertise in newer areas such as blockchain technology.