The digital shift underway in the financial sector has brought umpteen innovations that impact both on how businesses function and how they deal with their customers. Anticipating consumer need has become crucial to finance providers who can now efficiently and accurately analyze customer behavior to offer relevant products and services at the right time. The FinTech arena, with its embrace of artificial intelligence, is bringing all sorts of promising opportunities to the race towards business acumen. The main barrier is no longer the need to convince investors just how valuable these new tools can be; it’s convincing companies to put their faith in these new channels for finance.
With the arrival of new entrants – the FinTechs, GAFA and telecom operators – banks are now under big pressure to rethink how they operate, organize themselves and offer services.
So just how has the market responded to the advent of these new players? What’s their place in the value chain and how can they advance it? What will be the big takeaways of digitalization of the finance industry for companies?
The business financing market
In the Eurozone, volume of lending to business at the end of April 2016 was €4.3 billion.
France alone was responsible for 21% of this, 70% of it related to direct investment and 24% to cash flow. According to an ECB survey, SMEs in the Eurozone no longer see access to credit as a block to business development. Customer growth remains their principle concern. Their demand for credit is driven by the need to finance capital investment and working capital. They also stress that availability of bank loans (borrowings and overdrafts) has increased and that banks are ever more willing to offer them lower and more competitive interest rates.
The main players
New technologies were introduced to the banking sector as far back as the early 2000s, with Internet advances giving rise to online banking. But now technological innovation is expanding to all areas of banking and finance, paving the way for the emergence of new players.
The FinTech industry
A FinTech is usually defined as any company employing new technology and innovation to offer financial services. But it’s the use of artificial intelligence that’s set to bring the biggest disruption, alongside the explosion of Big Data and analysis, task automation and machine translation. The powerful technology mix of Machine Learning and cognitive systems is now arming the FinTech industry with vital insight into how customers use and invest their money and empowering it to deliver personalized and relevant financial advice. FinTechs are shaking up the old established order and domination of traditional banking. They range from:
- Technology companies highly specialized in a single finance service, such as online customer billing;
- Technology companies with direct financial links to banks. The French Public Investment Bank (Bpifrance) and French co-operative bank Crédit Mutuel Arkea have a big stake in FinTech;
- Traditional banks building a digital business model, or those that have established or are on the way to offering online services;
- Crowd-funding platforms that allow lenders (individuals and companies) to provide funds in the form of equity.
FinTechs thus far have mainly positioned themselves in the money transfer and payments sector. According to a McKinsey study of the 350 most successful FinTechs worldwide they account for just 10 % of business financing – 90% of which is SMEs and 10% major companies.
The number of FinTechs involved in business funding is limited in France. Of the 57 FinTechs that make up the France FinTech association, only 13 (23% of the total number) participate in company financing, and those that do tend to focus on crowd funding and equity funding. Two FinTechs enable customer invoice financing; one other enables financing via inter-company exchange or bartering of services.
So, despite the media spotlight it’s getting now, FinTech’s contribution to business financing is still pretty minimal. In fact, currently, it totals €106m (€32m in interest-bearing loans; €24m in bonds, €24m in capital), figure that represents a mere 0.04% of total bank landing.
A bank is a credit institution that provides banking services to commercial ends and sells a range of other financial services. McKinsey figures indicate that between 15-20% of global banking revenue is derived from business financing.
The economic model for business financing is based on services distribution via a physical network of bank branches, and a ‘spread’ that translates to net banking income (NBI). Here’s how a World Economic Forum report defines the traditional banking model:
- Limited access of loans to individuals and companies with higher risk profiles;
- Slow speed of service owing to traditional adjudication processes with multiple layers of approval;
- Poor customer experience due to highly manual adjudication processes and requirements fall short of increasing expectations of customer experiences;
- Operational inefficiency and reduced risk appetite of banks, which results in low returns on savings.
In the future, external factors, such as the ones listed below, will increasingly impact banking strategy and levels of risk deemed acceptable:
- The low level of interest rates: at end April 2016, new lending rates were on average 1.46 %, slightly above the Eurozone average of 1.37%. The result is poor net banking income and low banking profitability;
- Competition from the FinTech sector: the ECB reports that the retail-banking sector has seen an uplift since the 2008 financial crisis. Current low interest rates have motivated banks to diversify their income sources and prompted them to establish more commission- and fee-based activities. And it’s these areas that FinTech’s has in its sights;
- The need to improve operational efficiency: banks would do well to expand their service distribution channels. This way, selected products can be offered through the branch networks and others via digital platforms.
Traditional banks are becoming increasingly aware of the disruptive influence of FinTech and the competition that it represents. Customers seeking speed, flexibility and simplicity now have new demands that banks simply aren’t set up to meet. If the traditional banking sector is to resist getting left behind by the FinTech industry, it’s going to have to address the areas of agility and innovation where it’s falling short. New technologies, with artificial intelligence at the forefront, will be key to meeting this challenge.
 ECB Statistical Data Warehouse
 Cutting through the FinTech Noise – Mckinsey
 Baromètre du Crowdfunding en France réalisé par CompinnoV pour Financement Participatif France – 2015
 WEF: The future of financial services
 Financial Stability Review, May 2016 – Special features (page 7).