The FinTech Revolution Isn’t What You Think

October 24, 2017 - 5 minutes read

The advent of cryptocurrencies and blockchain heralded a new optimism in FinTech. This positivity extends beyond the excitement of FinTech app developers and other technology enthusiasts. Plenty of people believe this is the dawn of a new disruptive era for finance. Financial institutions would lose their clout, and power would return to the people.

At least, that’s what many FinTech startups would have wanted you to believe. Once upon a time, these new companies strived to take over the value chain from the incumbent financial firms. Now, it’s a different story — many of these startups are now partnering up with the same big financial institutions that they originally aimed to disrupt, and both sides benefit.

How the Big Boys Benefit

Financial leaders know their industry’s landscape is shifting priorities. Before cryptocurrencies, blockchain, and AI app development came into the picture, back-end tech took a back seat to the front office. Big institutions used to rely on transaction execution to bring in value. Now, technological infrastructure is becoming the linchpin to determine which institution will survive.

Companies like Betterment, SigFig, and Wealthfront have utilized robot wealth managers to such great success that big players like Morgan Stanley have taken notice and followed suit. Just 15 months after implementing their own wealth management division, Morgan Stanley’s stock price grew by 72%. From this figure alone, it’s no wonder why big institutions are keeping their eyes on new technologies now.

Besides this, partnering with FinTech startups also allow the traditional institutions to not only nullify a disruptive threat but use their technological innovation to their advantage. In a recent poll, 87% of UK financial firms cut costs through these partnerships. 54% confirmed that they also increased revenue. Essentially, these large institutions get to outsource the innovation process to these startups while holding onto a healthy chunk of the profits.

What’s in It for the Startups?

After steadily growing, the number of new FinTech startups in Europe and the U.S. has been rapidly declining since 2015. This is due to two factors. Many of these startups have big financial firms as key investors, and quite a few are directly acquired by the big firms.

Financially, it’s no wonder that these startups are joining forces with the big companies. Often, these startups raise more money quicker through these deals. Big institution bureaucracy may slow down innovation, but the funds allow the startups to have greater financial security. It’s a tempting trade-off.

Big institution investment in FinTech startups shows no signs of slowing down. Citi, JP Morgan, and Goldman Sachs all have numerous FinTech startups in their portfolios. In the first half of 2017, these corporations took part in more than 20% of FinTech investment deals. This trend will probably grow in 2018.

You Say You Want a Revolution?

While the FinTech revolution is pivoting to the dismay of those who wanted to see the incumbent institutions crumble, there is still a revolution that’s thriving. Yes, big firms will still dominate the industry, but the value chain structure and how they derive money from it is morphing.

The way these big institutions compete is transforming, and winning is no guarantee. There’s still a chance that any of the big names in finance could fall to the wayside, but it would probably be at the hands of another big company, not a startup as it was originally imagined.

While many San Francisco mobile app developers would rather opt for a startup job than one in a corporation, disruption will still bleed into the everyday financial transactions of our lives. New financial paradigms have generated enough momentum now that it can’t be stopped. All that’s left to determine is who profits from that momentum.