Banking and Regulatory Responses to Fintech Revisited—Building the Sustainable Financial Service ‘Ecosystems’ of Tomorrow

Abstract

Over the last decade, FinTech—broadly defined as the use of new technologies to compete in the marketplace of financial institutions and intermediaries—has disrupted the financial services sector. Here, we revisit the question of how banks and regulators can best respond to this disruption. We argue that incumbent financial service providers can learn useful lessons from the experience of the most innovative companies in the world and their efforts to navigate the new realities of doing business in a networked age.

One of the striking features of successful large businesses with an established track record for sustained high performance has been their capacity to reinvent themselves as what we characterise as innovation ‘ecosystems’. A key element of an ‘ecosystem’style organisation has been the implementation of effective corporate venturing strategies that feed dynamic, technology-driven innovation (what has been termed borrowing “the Start-Up Genie’s Magic”).

Here, we identify seven corporate venturing strategies adopted by the most innovative companies in the world and argue that incumbent banks and other financial service providers could utilise similar strategies in responding to FinTech. A crucial element of these strategies is a recognition of the value of co-creation, namely an inclusive, collaborative partnering between incumbents and on-traditional market players. To implement this objective effectively, incumbents need to absorb the energy, skills, and resources of the most dynamic start-ups. We argue that some banks are already moving in this direction and that this trend towards the ‘unbundling’ of incumbents is likely to continue.

We conclude with a brief discussion of the implications of such an account for regulators and regulatory design, more generally. In order to establish an environment for successful and sustainable ‘ecosystems’, regulators need to become active participants in these more open forms of business organisation. We characterise this regulatory approach as ‘community-driven’ regulatory design and identify some key issues with such a regulatory strategy.