Dana Doswell is Head of Strategy at Sidepart – a digital strategy firm that serves clients focused on North American, UK, and Latin American markets, helping them optimize the use of data in their marketing and sales strategies. Dana is also involved in ethical development of financial systems and educates the public on how they impact markets. She can be reached at [email protected]
If you’re reading this content on a laptop (that you probably bought from Apple, Google or Microsoft), there’s a good chance you paid more for it than you spend on a month of rent. For many of us, phones, laptops, tablets and smartwatches are our prized possessions that are with us every day and everywhere. If you don’t have insurance, you worry about the device, and if you do have insurance, you’re always a little annoyed with your policy’s price tag.
Now, what if you could buy eight-hour insurance for your computer, instead of making monthly payments for several years?
When you do (it’s only a matter of time), you’ll have the option of buying from a FinTech or TechFin. The two are different – and here’s why.
Thanks to the complexity of its regulatory regime, the financial services industry has been slow to respond to the wave of innovation we have seen sweeping across industries like entertainment, media and retail. Over the past 10 years, we have seen the development and evolution of new–and better– ways of banking that bring customers the same products and services, but in more convenient ways – known as FinTech.
Recently, TechFin has been added to the jargon mix, causing confusion because of its seemingly similar impact on the market. So how different are these two concepts?
At a high level, some FinTech companies are built to sell to (or be acquired) by banks and other large financial institutions. The other type of FinTech company serves the same market as a banking institution and strives to be a stand-alone offering.
FinTech has stemmed from the new and improved ways financial institutions have used technology to improve efficiency, effectiveness and bottom-line on existing financial products and services they offer to their clients.
For the purpose of this article, we specifically going to be talking about FinTechs that enter the market with the goal of being acquired by large financial institutions.
FinTech, TechFin – are they not the same thing?
At first glance, these two types of companies may seem very similar, but they’re not.
FinTech – starts with traditional financial offerings and uses technology to make them faster and more efficient. Banks that offer online banking are examples of how FinTech is being used today.
TechFin – starts with technology, and then uses its market positioning to offer financial services and products. A great, recent example of TechFin is the launch in August of the Apple Credit Card.
Currently, TechFin is revolving around Facebook, Amazon, Apple, Netflix and Google (known as FAANG) of North America and Baidu, Alibaba and Tencent (the BATs) of Asia as major initiatives are made to expand the reach of tech giants into the world of financial services. Apple, notably, is included in this conversation. The banking industry has taken notice by going beyond simply improving the products and services they currently offer. They are also forced to take into account an entirely new set of competitors as it is likely that banking isn’t going to be owned only by banks for much longer.
Difference #1 Market Reputation
Banks enjoy centuries-old reputation for security and trust. As a result, they have become an integral part of how societies function. FinTech within banks support and improve existing products and services.
The FANG tech giants have built strong and global brands based on clean, easy-to-use design that service the needs of millions of consumers. They leverage their strong reputation to offer banking services consistent with the “customer-centric” design and philosophy they are known for. After all, who doesn’t want an easier, quicker and more efficient way of managing his/her money?
Difference #2: Infrastructure vs No Infrastructure
In the context of FinTech vs TechFin, speed is everything. When it comes to the ability to innovate, change and iterate with speed, the clear winner is TechFin.
However, banks have taken centuries to build a reputation of trust and security. Over the past 50 years, banks have managed the transition from completely manual, paper-driven processes to the way banking is done today – a combination of in-person and online service offerings. The result has been a massive investment in infrastructure that has allowed them to make the shift from analogue to digital – and for a while, it worked. But unforeseen developments in technology have made their hefty investments an impediment to update their infrastructures to a level they can use to effectively compete with FinTechs.
TechFins, however, are considered new kids on the block and define the age of post-mainframe. With almost no physical infrastructure, FAANGs and their cousins around the world have been able to build dynamic systems at a fraction of the cost and innovate at speed. A great example comes from a post by Chris Skinner, in which he talks about Alipay, a 14-year-old mobile and online payment platform from China, completing their fifth-generation system development:
“…the first-generation system was purely an escrow service for taking payments. The second was to scale and used Oracle and Microsoft platforms. Then they found that Oracle and Microsoft could not scale enough to keep up with their business needs, so they developed their own cloud-based services to handle the scale they needed, as well as creating their own database structures. The fourth-generation was to have better fraud and risk management for the scale and volume of transactions they were taking and used artificial intelligence to manage the processes in real-time. Finally, the fifth generation is to get to the point where two billion users can make a million transactions a second.
I’m just thinking through those numbers and realized that they are throwing away their systems every three or four years. When did your bank last throw away your core systems and redevelop them from scratch?”
There is a significant advantage TechFins have over FinTechs when it comes to their ability to innovate and iterate in an agile way.
Difference #3: Regulatory Environment
Regulatory regimes have consistently grown vis-à-vis developments in financial services. Banks hold, process, and secure the personal data of billions of people across the world. They also spend billions of dollars to ensure compliance with banking regulations.
Regulatory compliance is a key defining factor between traditional financial institutions and TechFins. The former are subject to an average of 128,000 different regulations while the latter are subject to an average of only 27,000 – thanks to Chris Skinner for this valuable breakdown.
In the US, Facebook is venturing into the world of payment through WhatsApp. In the UK, Alipay is partnering with Barclaycard to offer its services to millions of tourists. And then there’s the recent launch of the Apple Card. These are examples of tech giants turning to financial services. So, would you rather buy insurance for your computer from a bank, or from a FANG? It seems as though past conversation has been about FinTech and the new conversation is about the impact TechFins are having on the financial services industry.
And the next overarching question? How will regulators respond, and can they respond quickly enough to level the playing field between FinTechs and TechFins vying for market share across the global financial industry?