Banking and Regulatory Responses to FinTech Revisited : Building the Sustainable Financial Service 'Ecosystems' of Tomorrow

Over the last decade, FinTech – broadly defined as the use of new technologies to compete in the marketplace of financial institutions and intermediaries – has disrupted the financial services sector. In this paper, we revisit the question of how banks and regulators should respond.We argue that incumbent financial service providers can learn useful lessons from the experience of the most innovative companies and their efforts to navigate the new realities of doing business in a networked age. One of the striking features of successful large businesses with an established track record for sustained innovation has been their capacity to implement effective corporate venturing strategies that continually feed dynamic, technology-driven innovation (“borrowing the startup genie's magic”). Here, we identify seven corporate venturing strategies adopted by the most innovative companies and argue that incumbent banks could utilize similar strategies in responding to FinTech. A crucial element of these strategies is a recognition of the value of “co-creation,” namely an inclusive, collaborative partnering between incumbents and non-traditional players. To implement this objective, incumbents need to become open “ecosystems” that absorb the skills and resources of the most dynamic startups. We argue that some banks are already moving in this direction and that this trend towards “unbundling” will likely continue.The paper ends with a discussion of the implications of such an account for regulators and regulatory design. In order to establish an effective ecosystem, regulators need to become active participants in these new ecosystems. We characterize this approach as “community-driven” regulatory design and identify some key features of such an approach