The Disruption of Banking
A new report from The Economist Intelligence Unit titled “The Disruption of Banking” was released October 20. The report centers on exploring the potential impact financial technology, also known as Fintech, has on established banking institutions.
In order to develop a fact-based perspective, The Economist Intelligence Unit report, sponsored by Hewlett Packard Enterprise, conducted parallel surveys of more than 100 senior bankers and 100 Fintech executives. The objective “is to determine their respective views on the impact of Fintech, the strengths and weaknesses of the participants and the likely landscape for the retail banking industry over the next five years.”
The Banking Perspective
According to the study, “more than 90% of bankers project that Fintech will have a significant impact on the future landscape of banking. Almost a third project that Fintech will win an equal share or even dominate the market.”
When asked what is holding the banks back from adopting new technologies, the banks, by their own admission, cited lack of a clear digital strategy, cultures unsuited to rapid change and an inability to attract top tech talent. Another oft-cited challenge to banks is their legacy technology systems. Many banks’ IT systems are “ramshackle structures that include systems installed in the 1970s, 1980s and 1990s,” according to the report.
The Fintech Perspective
One of the more interesting findings from the survey is that Fintech executives respect the banks more than the bankers do themselves. When asked about the future balance between the two segments, “Fintech executives were more than twice as likely to predict that banks would continue to dominate the market (46% v 20%).”
Fintech executives were also forthcoming in their self-assessment of weaknesses in competing against banks. One area of concern is winning customer trust, which is critical since Fintech is essentially asking millions of households to move their financial relationships to untried entities, the report quotes Fintech executives.
When asked to list their strengths, the idea of culture came up. Fintech execs feel they have “an ability to move fast, to take risks and to innovate.” This strength is acknowledged by both the Fintech firms and the banks that compete with them, cites the report.
Fintech executives were asked to give their views on the likely competitive balance between themselves and banks. While they agreed Fintech will not dominate, they believe they will take significant share. Numbers are starting to bear that out: Fintech companies are showing early success, reporting strong revenue growth in 2014. And investors love them. Forbes lists the top 15 Fintech firms and the money that is being poured into them from venture capitalists.
What about Security?
When it comes to security, the research reports that “many Fintech firms do not place as high a priority on security as do the counterparts at banks.”
Any banking institution, startup or otherwise, needs to think about protecting sensitive PCI (Payment Card Information) data, such as credit card account numbers, as well as PII (Personal Identifiable Information), including bank account numbers, names and addresses. As these businesses grow their customer base, they will collect, store and use these various types of sensitive customer data that must be protected at rest, in motion, and in use. Best practices in the financial industry recommend a data-centric approach to protecting the data wherever it goes, an approach companies need to implement as they build their platforms, not as an after-thought.
Since a start-up Fintech company may not have the large customer base of an existing bank, they may not see data security as their most pressing security or business issue. However, as their business grows, and they begin interacting with more and more customers, they will need to provide data security – just as any financial institution must do to protect the privacy needs of its customer base.