Fintech entrepreneurs have seized the opportunities created by mobile technology to reach more customers with greater ease, less expense, and in a more engaging way.
Global investment in fintech in the first three quarters of 2016 was US$18 billion, compared with US$19.1 billion for the whole of 2015.
Rather than viewing fintech as disruptive competitors, financial services companies are now looking for ways to collaborate with these businesses for mutual benefit.
The hunger to acquire grown-up startups is rising—in 2015 there were 94 fintech deals globally worth US$50 million or more, a record high.
Investing in fintech through corporate venturing arms or bespoke fintech funds continues to be a valuable tool for exploring the market and buying in technology. Investing through fund structures allows institutions to monitor developments in the market without having to commit to an acquisition that is promising but yet to prove its relevance.
Banks headquartered in the US must ensure compliance with the US Bank Holding Act and the Volcker Rule, which complicates exploring fintech. Banks subject to these regulations have sought other ways to engage with fintech, such as supporting incubators or accelerators.
The combination of M&A deals, joint ventures, and partnerships with fintech firms is helping established giants become more efficient and open, as well as creating new distribution channels and cutting down costs.
While the focus on fintech M&A is predominantly on generating growth, the emergence of new capabilities can also help larger financial institutions to navigate regulatory requirements.
Many financial services firms find it difficult to bridge the culture disparity between large financial services firms that are rigid but powerful and up-and-coming fintech startups that offer huge potential but lack the scale.
Integrating fintech assets carries the risk of clashing cultures. Further, embedding new technologies and ways of working when large amounts have already been invested in legacy projects and infrastructure can also cause disharmony.
While financial services executives look to find ways to allow fintech to innovate and revolutionize, the harsh reality is doing so could threaten jobs. A March 2016 report from Citigroup suggested that 1.7 million jobs would be cut over the next decade as fintech develops.
Another potential issue for emerging firms is gaining the trust of consumers. A 2016 survey from CapGemini and LinkedIn found that fewer than one in four customers trust their fintech provider.