Outside voices and views for advisers

Fintech learns to play nice with traditional institutions

Jan 12, 2018 @ 1:44 pm

By Whitfield Athey

Fintech is finally learning to play nice with the financial services industry.

The last couple of years have seen fintech upstarts forge successful partnerships with incumbent financial institutions to better the industry from the inside out. But it wasn't always this way.

Fintech has become the land of opportunity for entrepreneurs and investors alike since the financial crisis. At first, these aspiring moguls figured their innovative technology and financial backing were sufficient to steal customers away from the big bad banks, asset managers and insurance companies, and completely upend the industry.

Surely they had intentions of following the playbook written by Uber and Lyft, which exposed the taxi industry for its lack of innovation and succeeded in transforming on-demand personal transportation. As they came to find out, financial services is a different animal. It is very well insulated from disruptive outside forces, for a number of reasons. They have longevity. They have massive, wealthy, and loyal client bases.

And because of the constant onslaught of regulation and public scrutiny they have to withstand, they are completely comfortable operating in low margin environments. Financial services incumbents are in a category by themselves, and perhaps Man vs. Wild's Bear Grylls, as the world's ultimate survivalists.

After years of competition and acquisitions, the industry appears to have found a recipe for success — collaboration. Examining the journeys of a couple disruptors that made major partnership announcements in 2017 provides a clear view of what progress in the age of fintech looks like.


There are few better examples of this trend being played out than in the automated investing space. Betterment, now the largest independent online investment adviser, was one of the first robo advisers to dominate the headlines.

But after five years and hundreds of millions of investment dollars pumped into the business, they still don't even rank in the top 400 of retirement assets. Watching the likes of Charles Schwab and Fidelity build out their own automated investing services must have brought them down to earth.

They finally came to the realization that the incumbents they were trying to beat were actually the means for giving the wealth management industry the upgrade it desperately needed. Look no further than their recent partnership with BlackRock and Goldman Sachs Asset Management to help introduce new digital strategies to the incumbents' respective platforms.


A recent example of a true partnership is the deal Ripple struck with American Express, bringing them onto Ripple's blockchain network, RippleNet. The network allows American Express to provide a real-time, business-to-business global transactions channel between U.S. and U.K. customers.

Ripple already had a number of partners signed onto the network, included Credit Agricole, but the commitment from a player with the caliber of American Express shows how the financial services industry has a resistance to being disrupted until a major player decides to disrupt itself through a fintech partnership.

It's reasonable to believe that if Ripple had stayed independent, it wouldn't have been successful, at least not for a long time. And although blockchain has yet to make any real waves in asset management, the Ripple partnership offers a glimpse of how the technology may gain traction in other sectors.


In these examples, both the upstart fintech firm and the incumbent they end up working with developed a mutual respect for the other's capabilities and limitations.

The monolithic incumbents that have deep customer bases and brand loyalty recognize that they are slow moving, risk averse and need the innovation and agility of the fintechs to survive in a rapidly changing environment. The fintechs recognize they can only get so far on their technology alone, and need access to the customers and the brand equity of the incumbents.

Optimism around fintech development remains strong, with venture-backed investment on pace to reach a record high by the end of 2017. Financial institutions and fintechs, through much trial and error, have finally come to terms that the road to an optimal financial services industry is paved with partnerships that leverage each other's strengths. Now that they've figured that out, 2018 may just be the most disruptive year yet.

Whitfield Athey is the CEO of Delta Data.


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