Removal of safety and compliance friction is the key to growth

When London Fintech Week starts today, we are reminded of the important role the city plays in the global fintech industry. In fact, the British fintech sector – much of it centered in London – has undergone some of a golden age in recent years, and the figures confirm this. The UK recorded a record year of annual fintech investment in 2021, exceeding $ 11.6 billion – an increase of 217% from 2020 – according to Innovate Finance, the UK’s fintech industry body. It represents 45% of all fintech investments in Europe.

The Fintech boom is driven by a mix of factors, from consumer demand for personalized digital interactions in all areas of their lives, to exponential growth of technologies such as cloud, artificial intelligence (AI) and blockchain. These technologies enable new entrants to enter the financial services market with disruptive business models to meet the expectations of customers who are more digitally native than ever.

Large technology companies are now developing bank-as-a-service models to offer retail banking services, while the buy-now-pay-later trend has driven the growth of embedded financial models. In this bold new world of fintech, companies such as Klarna and neo-bank Revolut have achieved higher valuations than some established British high street banks.

But the established banks have noticed and see the opportunities a thriving fintech sector can offer. More than 40% of UK financial services professionals say the IBM Censuswide survey shows that their institution plans to modernize over the next five years by evolving into a platform business model that uses application application interface (API) – which supports rapid innovation and rollout of various digital services, from mortgages to payments.

Part of the beauty of this platform model is that it allows banks to consume ready-to-go innovation from fintech more seamlessly. In many cases, this is still far more cost-effective and efficient for the banks than developing the same services internally. Given the pressure the banks are facing to find new revenue streams and keep up with customer requirements, they are now looking to work with fintechs as a top priority.

Eliminate friction by working with financial institutions

Yet a golden age is not quite the same as a fairy tale. Despite the huge investments, fintechs – and the financial institutions they need to trade with – have important challenges to overcome in order to unleash their full potential.

Perhaps the biggest source of friction that keeps fintechs and banks from working together faster is the stringent regulatory requirements fintechs must meet before banks can board them. It is important that fintechs do not introduce systemic risk into the financial system – otherwise their growth and risk to the financial system will be unacceptable. Onboarding can be an intensive process, often taking as long as 18 months or more. This is too long for many start-ups to wait – they need to be able to start working with banks quickly to reach revenue targets. It is also a frustration for the banks, which must be able to seize market opportunities quickly before the competitors get there first.

Security is also a major concern for banks and regulators, especially when it comes to the use of technology, and it is important that fintechs adapt seamlessly with the industry’s strict security standards.

At the same time, fintechs must adapt to the technological reality of the financial institutions they aim to do business with. With regulators insisting that banks take steps to reduce the risk of vendor concentration, financial services companies must operate in a hybrid multicloud environment, allowing them to use different cloud providers across their local and public cloud platforms. IBM’s surveys in the UK found that 87% of financial services companies have already migrated to a planned multi-cloud model or are planning to do so.

Partnerships are crucial to success

For most fintechs, it is simply not possible to navigate these challenges alone. Fintechs must partner with a partner who can help them meet the security and compliance requirements of financial institutions and then provide the services these institutions need, wherever they need it.

Many financial firms recognize that cloud platforms designed for industry can help with this challenge, by offering enterprise-class automated compliance checks and security technology. Nearly 90% of UK financial professionals have already deployed or are planning to deploy some sort of industry-specific cloud, according to IBM research.

An industrial cloud platform also forms the basis of an ecosystem that connects financial institutions with fintechs and other technology providers, in a secure, compatible environment. This means that transactions between all actors in the ecosystem can take place faster and ultimately help to reduce the risk to the digital supply chain. When a bank and its providers all use the same secure platform, it eliminates the complexity and fragmentation of the supply chain – the primary source of IT vulnerabilities that cybercriminals easily exploit.

Unlocks the next stage of prosperity for fintechs

The Fintech sector has undoubtedly had a rapid global expansion. But financial regulators are catching up with the new business models and technologies that have become prominent – from cloud and AI to digital assets – and the needs of financial institutions are evolving accordingly. Unlocking the fintech sector’s next growth phase will require collaboration with partners who can combine deep financial service expertise with technological solutions that remove barriers to new business opportunities with financial institutions. When that happens, the opportunities for the entire financial services ecosystem – and society at large – will be truly golden.