Consolidation in FinTech: The New Paradigm

As a relatively young entrant, the Financial Technology sector has had a significant impact on the financial industry. As a rapidly growing area that offers swift, cost – effective and transparent financial services, FinTech has entered a new phase in its evolution. It has revolutionised the financial decisions that customers take, as the Internet and smartphones are slowly replacing other point of sale devices. The scale that the FinTech sector can achieve is unparalleled and this era is being shaped by new technologies, regulations and a shift in customer behaviour.

The FinTech companies are undoubtedly making the financial sector more inclusive and methodical. They have disrupted the traditional financial services sector through innovative technologies such as machine learning, artificial intelligence and data analytics to provide an ideal experience to users.

Is FinTech Consolidation the next big thing?

Today, FinTechs are flush with capital and have developed products and services that are redefining the core of banking. The FinTech start-ups moved quickly and armed with their innovative business models, embraced digital innovation to provide the very best experiences to their users. They are also proving that targeting niche segments, that were not traditionally profitable for the legacy institutions, is a viable proposition.  This has forced the legacy Banking institutions to build their own propositions, to fit into this new era and stall the rise of these challengers. These two sectors are leveraging their respective advantages to be in a more competitive position.

The FinTech battlefield is also growing more crowded, with new players constantly entering the sector. However, most of them have a similar target customer base and similar market strategies. Thus, with the customer base and scope of most new FinTech challengers being limited, industry insiders believe that consolidation is inevitable. As the industry continues to expand, the appetite of customers and investors remains unsatisfied. Research has also shown that the users are not completely loyal yet. Most will stay with the challenger institutions only if their customer service expectations are being fulfilled. Most digital financial service providers are also under constant pressure to offer a wider portfolio of services. However, businesses that are wondering how to succeed in this new era must understand the market forces that are responsible for the changes. This has led to consolidation in mature areas such as lending and payments, as well as in emerging areas such as voice-based commerce, since start-ups are on a quest to scale and fuel growth.

It is also undeniable that the FinTech industry is maturing and is successfully transitioning into a partner, from a disruptive threat. It is integrating into the traditional financial ecosystem to further strengthen it and broaden its horizons. These institutions might survive but they will have to consolidate to truly grow in this Digital-first era. The legacy institutions can learn digital innovation from the FinTechs, who in turn will benefit from having access to the much larger user base, product diversity and resources of banks. In fact, the future of the banking industry could very well be driven by consolidation and cooperation between FinTechs and traditional institutions. Joint ventures between financial institutions and FinTechs are cropping up, which are launched independently as standalone businesses. These new ventures are usually autonomous, agile and innovative, and efficiently sell the ‘Digital Experience’. Considering the large number of partnership announcements that are being made, Fintechs have clearly recognised that consolidating will help them remain relevant. From the user’s perspective, this will offer one central platform, which will meet all their financial needs. These individual companies can also maintain a tight grip on customer loyalty and help to develop an ecosystem where the user is the ultimate winner.

A genuine move toward consolidation is beginning to take centre stage in the industry as the value chain evolves. This amalgamation has had a positive impact on the lives of millions of people globally and it offers future – proof disruption.

By TM Praveen, CEO of Opus Consulting Solutions