In 2018, there were 12,131 FinTech startups worldwide. In a little over two years (as of February 2021), that number has more than doubled to 26,045 startups.
Every bank executive worth her salt is at least aware of the competitive threat posed by FinTechs, even if she is struggling with the right countermoves in a world that is changing by the second.
Banks weigh their pros and cons
In order to respond to new market entrants, many traditional banks are leaning into their natural advantages: brand recognition, deep relationships with customers and communities, economies of scale, and process knowledge that in many cases leads to greater efficiencies and savings that can be passed on to the consumer.
However, the disadvantages often loom larger. Any positive outcomes from historical process knowledge may be negated by inefficient legacy systems and simple human inertia; unwillingness to change has been the downfall of many once-behemoths in other industries. Perhaps most daunting is that banks are facing extensive, complex regulation that is changing more rapidly every passing year.
Letting FinTechs in on the action
While it may seem natural for banks to seek to prevent FinTechs from entering the field by, for example, protesting their ability to get banking charters, allowing easier entry may be better for everyone.
“The answer isn’t to keep FinTechs out of banking, but to let them in — provided they can satisfy the regulatory standards. To the extent there are competitive advantages of not being regulated, the answer is to regulate them.” — Michele Alt, Klaros Group
That said, regulating FinTechs doesn’t make the challenges faced by banks any easier. The rise of FinTechs naturally goes hand in hand with the proliferation of digital currencies and digital banking services, spurring a wave of new regulations that every player on the field will be subject to.
Some traditional banks are embracing this change, shown by recent announcements of bitcoin-friendliness by Morgan Stanley, Goldman Sachs, and USAA to name a few. And those that aren’t may soon not have a choice — if they want to stay in business.
Automation: A common need
As the generation of digital natives matures, more and more consumers will expect (and vastly prefer) digital products and services. Today, 46% of customers exclusively use digital channels for their financial needs.
That means everyone – banks and FinTechs alike – can expect to face increasing regulation in coming years that can only be managed by smart design and implementation of compliance technology. Many banking leaders understand the value of automation in keeping up with the massive volume and complexity of regulation and regulatory change, especially in its enabling of a more cost-effective compliance operation while actually reducing the risk of human error. Forward-thinking leaders are already well on their way to digitalizing their compliance programs, with spending on RegTech at $33 billion in 2020 and expected to grow to a whopping $130 billion in 2025.
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FinTechs — usually even more cash-conscious than big banks — will also find that automation will allow them to run lean internally for longer, without compromising the quality of their compliance program or their ability to properly follow regulations. Entering the market with a modern approach to compliance already in place will set the groundwork for future growth, while keeping expenses in check.
Ascent for complying in a ‘digital everything’ world
The pioneer of Regulatory Knowledge Automation, Ascent, helps banks and FinTechs understand exactly what they need to do in order to remain compliant with changing regulations. Using world-class, AI-driven technology, Ascent analyzes millions of lines of regulatory text in order to extract individual regulatory obligations, which are then mapped to a customer’s firm specifics (e.g. which product and services the firm offers or which activities it engages in). The result is a highly targeted register of obligations that automatically updates as rules change, providing our customers with complete knowledge of how to comply at all times.
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