A high-stakes competition is underway between traditional financial services institutions and disruptive FinTech startups.
The Economist reports that more than $25 billion has been invested in financial technology — FinTech — in the last five years, with 4,000 firms challenging banks in just about every product line. As financial services comprise about $1.2 trillion of U.S. GDP, increased levels of investment are likely.
Big banks have the advantage in this fight — at the moment. These institutions have well-earned reputations for safety and security. They benefit from strong, multi-generational customer relationships, have considerable brand equity, and offer myriad financial products and services.
Except well-funded, agile FinTech startups including SoFi, Billguard, Square, Wealthfront, Venmo and Neighborly are innovating and nibbling away at banks’ market share. They’re doing this by offering custom solutions for everything from student-loan refinancing and payment processing to lending and facilitating neighborhood investment.
Still, those betting that banks will go the way of the mainframe computer are likely to be disappointed. If banks address the threats by embracing and investing in the technologies that are enabling the FinTech disruptors to level the playing field, they will continue to thrive.
The good news is that banks have the capital to invest in technology and to innovate through software, particularly open-source software, which is powering the solutions of game-changing companies worldwide. Forward-looking financial institutions are already upping their tech game. Improving user experience, providing more insightful data analysis, and increasing cybersecurity are key areas where traditional banking and FinTech compete. Technology — specifically software — will have a big impact.
Read the full post at Marketwatch
Lou Shipley is a Lecturer at theMartin Trust Center for MIT Entrepreneurship at the MIT Sloan School of Management.