In a recent podcast sponsored by Goldman Sachs titled ‘The Digitization of Finance’, the bank’s co-head of technology, Don Duet, argued that although the industry as a whole has been slow to adopt technology, it is now ingrained into the DNA of Goldman.
Goldman has taken its time to get to grips with digital disruption, but, along with other finance giants, it seems that it is finally doing so. The financial sector spends the most on new technologies as a proportion of revenue of any industry, so its lethargy when it comes to development and implementation is hard to understand. The gains enabled by the speed that technology can bring are huge, and falling behind has allowed startups into the market who really, if banks had been quicker off the mark, wouldn’t have stood a chance.
It is, however, somewhat excusable. Finance has a number of obstacles to overcome that other sectors don’t. New software has to be integrated into legacy systems for a start, and there is also the increasingly complex regulations that have come in since the 2008 financial crisis. Concerns around security have also held them back from adopting the cloud to the same degree as other industries. Fundamentally though, the finance industry is one of the oldest in the world, and its systems and processes are deeply entrenched. Introducing new technology is like trying to add wheels onto a horse. Wheels were a great invention and necessary for progress, but when they were invented it wasn’t a case of just sticking them onto an old method of transport and hoping they’d work, the whole transport system had to be redesigned from the technology up.
In the future, however, new technology deployment cycles will be much quicker. Banks have realized where they have been missing out, with 40% of respondents to an Accenture survey saying they felt that the current time taken for their organization to deploy new technology was either negatively impacting its value, or providing no net benefit at all. They have subsequently invested heavily in digital banking, as well as accelerators, alliances and innovation labs. However, technological innovation requires an ‘agile’ (iterative, efficient and responsive to real-world issues) approach, and many banks have realized they lack the capabilities to do this as well as startups in the fintech space. Subsequently, rather than fight them, they are joining with them. Goldman’s equity research report, issued in March 2015, estimated that $4.7 trillion in revenue for financial services firms is at risk of being displaced by new tech-enabled or fintech company entrants. The report states: ‘First generation online financial services companies … traditional banks, asset managers, and payments companies are all working to adapt to these behavioral, demographic, and technologic realities. We expect partnerships, acquisitions, and competition will be key to the way the vertical develops.’
According to a joint report by KPMG and CB Insights, banks and corporations helped push financial technology startup funding to an all-time high of $13.8 billion in 2014 - more than double the 2014 total. Citigroup's fintech portfolio is the largest of all banks, with 13 start-ups backed from 2011 through 2015. Goldman Sachs is second, with 10 start-ups, while JPMorgan Chase has invested in five. The truth about FinTech, one that is often conveniently ignored, is that companies in the sector rely on the established financial services industry to advance. They simply lack the size to compete, and now that banking seems to have got itself together when it comes to digital, it is unlikely they ever will. Lending Club, the alternative lender, has a market capitalization of about $5bn. Wells Fargo’s is $280bn. It may be nice to think that age of digitization will bring down the big, evil banks, but the truth is that any startups that really do any damage can simply be bought out.