MAIN MENU

THEMES

Game on: Fintech disruptors vs old-school banks

Matt Ross
CFA
Global Industry Analyst
Boston

In my last blog post, I shared some high-level thoughts on the financial technology (“fintech”) industry and what its increasing relevance means for traditional financial services. Beyond the fast-growing digital payments space, I identified two broad categories of fintech “disruptors” that will present opportunities going forward:

  1. Infrastructure companies that use modern technology to solve business and technology orchestrations that have historically been executed by banks; and
  2. Product companies that leverage these new infrastructure providers to rethink traditional financial services products and develop more effective solutions.

How legacy financial services players (particularly banks) tap into the new infrastructure providers and respond to competitive threats from the emerging set of product companies will go a long way toward determining their fate long term.

The “modularization” of financial services

For the entire modern history of banking, there were “rails” that moved money (or messages about money) and customers that were trying to solve a financial problem. In between those two layers, banks did pretty much all of the problem-solving facilitation. The products banks sold sat on top of a vast, complex orchestration of technology infrastructure and business processes.

Modern technology, namely cloud computing and the proliferation of application programming interfaces (APIs), has enabled the “unbundling” of this complex orchestration:

  • Product fintechs are essentially disrupting the product layer of financial services by taking a “modular” mindset, attempting to break down banks (and other financial services) into component pieces and sell those pieces as standalone products. They are focusing on what their customers need and ignoring everything else.
  • The infrastructure fintechs, meanwhile, are redesigning the technology and business process layers and creating new components for the product fintechs to build on.

This modularization of the various components enables new modes of competition for existing services along the product layer in the above scheme. New infrastructure technology allows for the delivery of high-quality service to these new product fintechs, as well as new offerings to other types of companies that otherwise would have difficulty connecting into the bank technology environment.

No shortage of funding for the fintechs

My last blog post highlighted the massive amounts of venture capital pouring into the fintech market over the past year or so. Product and infrastructure fintechs have been recipients of much of this funding because:

  • There are hundreds of activities that reside in the business process/technology infrastructure areas of bank orchestration. Many fintechs and their backers believe the market for standalone products within those areas is big enough to support plenty of companies at high valuations.
  • Many of the traditional financial products sold to bank customers haven’t been improved upon for a long time. These are huge end markets where many fintechs are confident they can achieve large enough scale by reimagining what banks have done and doing it differently – and better.
  • There are many companies that have a financial services problem that is beyond the scope of their core business. They want to connect to an outside partner with an innovative culture that can solve specific problems quickly. This dynamic is expanding definitions of addressable markets for financial services.

Obstacles facing the incumbents

The modularization of bank architecture presents challenges to incumbent industry leaders (i.e., banks):

  • It is hard to shift a corporate culture toward a modularized, more open philosophy when the entire history of the organization has been the opposite.
  • Most banks are saddled with obsolete technology, so even if they wanted to adopt this new approach, the time and cost required to do so would likely be prohibitive.
  • Banks also face a pricing dilemma: When you’ve spent your whole history bundling everything into one product offering, how do you charge for the individual components?

Final thoughts

“Can the incumbent get product innovation faster than the startup gets distribution?” is an old tech adage that seems appropriate here. Fintechs clearly pose a challenge to traditional banks, but not every incumbent is doomed. It will be hard for many fintechs to acquire customers at favorable enough unit economics to survive long term. Some of them are selling features (not products), and the addressable markets may not be as large as envisioned for some standalone products. And while the pace of fintech innovation is accelerating, not all of these companies are super impressive; some will fail.

While banks as a group probably have more to lose than gain, those that adapt and embrace fintech (particularly infrastructure companies) could be net beneficiaries. Fintech is ultimately not a zero-sum game for incumbent banks. At a minimum though, these new fintechs are forcing legacy players to up their game and reconsider their business strategy, including the products they offer and how those products are designed and delivered to customers.

Important Disclosure

For professional, institutional and accredited investors only. The views expressed are those of the author and are subject to change. Other teams may hold different views and make different investment decisions. While any third-party data used is considered reliable, its accuracy is not guaranteed. Forward-looking statements should not be considered as guarantees or predictions of future events. The value of your investment may become worth more or less than at the time of original investment. Past results are not a reliable indicator of future results. Commentary provided should not be viewed as a current or past recommendation and is not intended to constitute investment advice or an offer to buy or sell securities. Wellington assumes no duty to update any information in this material in the event that such information changes.
Share on email
Share on print
Share on linkedin
Share on linkedin
Share on email

Categories

Related posts

DISCLOSURES

Wellington Management Company LLP (WMC) is an independently owned investment adviser registered with the US Securities and Exchange Commission (SEC). WMC is also registered with the US Commodity Futures Trading Commission (CFTC) as a commodity trading advisor (CTA) and serves as a CTA to certain clients including registered commodity pools and their operators. WMC provides commodity trading advice to all other clients in reliance on exemptions from CTA registration. WMC, along with its affiliates (collectively, Wellington Management), provides investment management and investment advisory services to institutions around the world. Located in Boston, Massachusetts, Wellington Management also has offices in Chicago, Illinois; Radnor, Pennsylvania; San Francisco, California; Beijing; Frankfurt; Hong Kong; London; Luxembourg; Singapore; Sydney; Tokyo; Toronto; and Zurich. ■ This material is prepared for, and authorized for internal use by, designated institutional and professional investors and their consultants or for such other use as may be authorized by Wellington Management. This material and/or its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares or other securities. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients.

In Canada, this material is provided by Wellington Management Canada ULC, a British Columbia unlimited liability company registered in the provinces of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec, and Saskatchewan in the categories of Portfolio Manager and Exempt Market Dealer. ■ In Europe (ex. Austria, Germany and Switzerland), this material is provided by Wellington Management International Limited (WMIL), a firm authorized and regulated by the Financial Conduct Authority (FCA) in the UK. This material is directed only at persons (Relevant Persons) who are classified as eligible counterparties or professional clients under the rules of the FCA. This material must not be acted on or relied on by persons who are not Relevant Persons. Any investment or investment service to which this material relates is available only to Relevant Persons and will be engaged in only with Relevant Persons. ■ In Austria and Germany, this material is provided by Wellington Management Europe GmbH, which is authorized and regulated by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin). This material is directed only at persons (Relevant Persons) who are classified as eligible counterparties or professional clients under the German Securities Trading Act. This material does not constitute investment advice, a solicitation to invest in financial instruments or information recommending or suggesting an investment strategy within the meaning of Section 85 of the German Securities Trading Act (Wertpapierhandelsgesetz). ■ In Hong Kong, this material is provided to you by Wellington Management Hong Kong Limited (WM Hong Kong), a corporation licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), and Type 9 (asset management) regulated activities, on the basis that you are a Professional Investor as defined in the Securities and Futures Ordinance. By accepting this material you acknowledge and agree that this material is provided for your use only and that you will not distribute or otherwise make this material available to any person. ■ In Singapore, this material is provided for your use only by Wellington Management Singapore Pte Ltd (WM Singapore) (Registration Number 201415544E). WM Singapore is regulated by the Monetary Authority of Singapore under a Capital Markets Services Licence to conduct fund management activities and is an exempt financial adviser. By accepting this material you represent that you are a non-retail investor and that you will not copy, distribute or otherwise make this material available to any person. ■ In Australia, Wellington Management Australia Pty Ltd (WM Australia) (ABN 19 167 091 090) has authorized the issue of this material for use solely by wholesale clients (as defined in the Corporations Act 2001). By accepting this material, you acknowledge and agree that this material is provided for your use only and that you will not distribute or otherwise make this material available to any person. Wellington Management Company LLP is exempt from the requirement to hold an Australian financial services licence (AFSL) under the Corporations Act 2001 in respect of financial services provided to wholesale clients in Australia, subject to certain conditions. Financial services provided by Wellington Management Company LLP are regulated by the SEC under the laws and regulatory requirements of the United States, which are different from the laws applying in Australia. ■ In Japan, Wellington Management Japan Pte Ltd (WM Japan) (Registration Number 199504987R) has been registered as a Financial Instruments Firm with registered number: Director General of Kanto Local Finance Bureau (Kin-Sho) Number 428. WM Japan is a member of the Japan Investment Advisers Association (JIAA), the Investment Trusts Association, Japan (ITA) and the Type II Financial Instruments Firms Association (T2FIFA). ■ WMIL, WM Hong Kong, WM Japan, and WM Singapore are also registered as investment advisers with the SEC; however, they will comply with the substantive provisions of the US Investment Advisers Act only with respect to their US clients.

Wellington Management logo

Contact Us

*Mandatory Field

Wellington Management logo

IMPORTANT INFORMATION

You are about to enter a website for professional/institutional investors and the information contained herein is not suitable for retail investors. Private/retail investors should not proceed any further.
By clicking “Accept” you expressly acknowledge and confirm that you are accessing this site for the purposes of acquiring information as a professional/institutional investor and accept the Terms of Use.

Your access to and use of the web sites (“Services”) of Wellington Management are conditioned on your acceptance of and compliance with these Terms of Use (“Terms”). By accessing or using the Services, you agree to be bound by these Terms. If you are accepting these Terms and using the Services on behalf of a company, organization, government, or other legal entity, you represent and warrant that you are authorized to do so. You may use the Services only in compliance with these Terms and all applicable local, state, national, and international laws, rules, and regulations.

Ownership
All materials on this web site are owned or licensed by Wellington Management and/or its third-party providers and are protected by US and international intellectual property laws. Unless otherwise indicated, all service marks, trademarks, and logos appearing on this web site are the exclusive property of Wellington Management. The information, materials, and other content of this web site may not be copied, displayed, distributed, downloaded, licensed, modified, published, reposted, reproduced, reused, sold, transmitted, used to create a derivative work, or otherwise used for public or commercial purposes without the express written consent of Wellington Management.

Products and services
The information, materials, products, and services on this web site are current at the time of writing and are subject to change. Not all products and services are available in all geographic areas. Your eligibility for particular products or services is subject to determination by and the approval of Wellington Management. No solicitation is made by Wellington Management to any person to use any information, materials, products, or services in any jurisdiction where the provision of such information, materials, products, and services is prohibited by law.

The information on this web site or in any communication containing a link to this web site is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares or other securities.

Investment products and services are available through Wellington Management. Investment products and services are not FDIC-insured, are not deposits or obligations of, or guaranteed by, any bank, and involve investment risks, including the possible loss of the principal amount invested. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or invest in a fund.

International use
Wellington Management makes no warranties that materials on this web site are appropriate for use in countries other than the US. Because the web site may be accessed internationally, you agree to comply with all local laws, rules, and regulations including, without limitation, all laws, rules and regulations in effect in the country in which you reside and the country from which you access the web site. The information on this web site is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation, or which would subject Wellington Management or its affiliates to any registration requirement within such jurisdiction or country.

No warranty
Wellington Management does not warrant the accuracy, adequacy, completeness, or timeliness of the information, materials, products, and services on this web site or the error-free use of this web site. All information, materials, products, and services are “as is” and “as available.” No warranty of any kind, express or implied, including but not limited to the warranties of non-infringement of third-party rights, title, merchantability, fitness for a particular purpose, and freedom from computer virus is given in conjunction with the information, materials, products, and services. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. Wellington Management does not warrant that the web site will meet your needs. You agree to assume the entire risk as to your use of the web site.

Limitation of liability
In no event shall Wellington Management be liable for any damages, losses, or liabilities including without limitation, direct or indirect, special incidental, consequential damages, losses, or liabilities, in connection with your use of this web site or your reliance on or use or inability to use the information, materials, products, and services on this web site, or in connection with any failure of performance, error, omission, interruption, defect, delay in operation or transmission, computer virus, or line or system failure, even if Wellington Management is advised of the possibility of such damages, losses, or expenses.

YOU UNDERSTAND AND AGREE THAT YOUR USE OF THIS WEB SITE IS PREDICATED UPON YOUR WAIVER OF ANY RIGHT TO SUE WELLINGTON MANAGEMENT OR ITS AFFILIATES DIRECTLY OR TO PARTICIPATE IN A SUIT FOR ANY LOSSES OR DAMAGES RESULTING FROM YOUR USE OF THIS WEB SITE.

Indemnification
As a condition of your use of the Services, you agree to indemnify and hold Wellington Management, its affiliates, and its and their respective partners, directors, employees, and agents harmless from and against any and all claims, losses, liability, costs, and expenses (including but not limited to attorneys’ fees) arising from your use of the web site or from your violation of these Terms.

Hyperlinks
Your use of the hyperlinks on this web site to other Internet web sites is at your own risk. Wellington Management is not responsible for the content or accuracy of third-party web sites hyperlinked from this web site, nor does it guarantee the products or services offered on third-party web sites. You should review the privacy statements of a web site before you provide any personal or confidential information.

Web site security and restrictions on use
As a condition to your use of Services, you agree that you will not, and you will not take any action intended to: (i) access data that is not intended for you; (ii) invade the privacy of, obtain the identity of, or obtain any personal information about any other user of this web site; (iii) probe, scan, or test the vulnerability of this web site or Wellington Management’s network or breach security or authentication measures without proper authorization; (iv) attempt to interfere with service to any user, host, or network or otherwise attempt to disrupt our business; or (v) send unsolicited mail, including promotions and/or advertising of products and services. Unauthorized use of the web site or Services, including but not limited to unauthorized entry into Wellington Management’s systems, misuse of passwords, or misuse of any information posted to a web site, is strictly prohibited. Portions of the web site are designated for password access only as indicated by a lock icon. In these instances, if you do not have an authorized password, no access is permitted.

Confidentiality and password security
Certain parts of this web site may be protected by passwords or require a login. You are responsible for maintaining the confidentiality of any user names, passwords, security questions, and answers. All information available through the privileged area of the site is confidential and proprietary to us. This includes all investment information and results, offering materials, financial statements, and other information provided through this part of the site.

You will use your best efforts to keep all this information strictly confidential. You will not disclose any of this information to any person or use it for any purpose other than those strictly permitted by us, in writing.

Severability
If any provision of these Terms is deemed unlawful, void, or for any reason unenforceable, then that provision will be reformed only to the extent necessary to make it enforceable, and it will be deemed severable from these Terms and will not affect the validity and enforceability of the remaining provisions.

Applicable law
These Terms and any action related thereto are governed by Massachusetts law and applicable US federal law. Any dispute relating to the above shall be resolved solely in the state or federal courts located in Massachusetts.

Privacy statement
Wellington Management respects the privacy of its clients and the confidentiality of information pertaining to its clients.

Information we collect
We may collect non-public personal information about you on RFPs, questionnaires, and other forms we receive from you, as well as from personal contacts such as correspondence, e-mail, telephone calls, or meetings. We may also receive information about you from third parties, such as your accountants, lawyers, financial consultants, and/or other service providers.

It also is possible to receive information from web browsers and apps regarding certain of your online activities using cookies, or other common tracking technologies. Some web browsers and other applications may provide a Do Not Track (DNT) preference setting. When a user turns on a tracking preference, the browser or application may send a message to web sites requesting that they do or do not track the user. At this time, we take no actions in response to any DNT settings or messages.

Information sharing
Wellington Management seeks to provide seamless service to all clients. To facilitate that process, information regarding client accounts is shared broadly between affiliates within the Wellington Management group of companies. For example, an affiliate may share information with other affiliates in order to facilitate portfolio management or provide client liaison services to a particular client. Client information may be used by Wellington Management in order to identify potential client needs for additional investment management services.

Wellington Management generally does not share non-public client information with unaffiliated third parties, except as necessary to perform the investment management services it has been hired to provide. For example, Wellington Management may share non-public client information with brokers and custodian banks in order to buy and sell securities and record those purchases and sales accurately. As a general rule, Wellington Management does not engage in joint marketing arrangements with unaffiliated third parties that involve the sharing of non-public information regarding Wellington Management’s clients. Wellington Management does not provide client information to unaffiliated third parties for their own marketing purposes.

Wellington Management does not disclose your information except as required or permitted by law. In the event that Wellington Management is involved in a merger, acquisition, reorganization or sale of assets, or bankruptcy, your information may be transferred or sold as part of that transaction.

Security policies
We use technical, administrative, and procedural measures in an attempt to safeguard your personal and other information from unauthorized access or use. No such measure is ever 100% effective though, so we do not guarantee that your personal and other information will be secure from theft, loss, or unauthorized access or use, and we make no representation as to the reasonableness, efficacy, or appropriateness of the measures we use to safeguard such information. Users are responsible for maintaining the secrecy of their own passwords. If you have reason to believe that your interaction with us is no longer secure (for example, if you feel that the security of any account you might have with us has been compromised), please immediately notify us by contacting your relationship team member.

Transfer of data to other countries
Any information you provide to Wellington Management through use of the Site may be stored and processed, transferred between, and accessed from the US and other countries which may not guarantee the same level of protection of personal information as the one in which you reside. However, Wellington Management will handle your personal information in accordance with this Privacy Statement regardless of where your personal information is stored/accessed.

Changes to Terms of use

We may revise these Terms from time to time; the most current version will always be at https://www.wellington.com/terms-use. By continuing to access or use the Services after those revisions become effective, you agree to be bound by the revised Terms.

Effective as of 17 January 2014

Remember me

Contact Us

*Mandatory Field