Financial technology—fintech—is taking over the financial services industry. New entrants are disrupting traditional financial services, from wealth management to making simple payments. What was previously handled by paper money and real humans is now being substituted by digital interfaces.

In 2017, we will see the relationship between traditional financial establishments and fintech continue to evolve. Financial firms are implementing new strategies in the wake of the threat presented by fintech. One of the main trends we see is fintech being viewed as partners as opposed to threats that can be ignored.

Let's explore the value that fintech is bringing to the financial services industry and how the ecosystem is changing. (For related reading, see: The Best Blogs for Financial Advisors to Read in 2017.)

The Value of Fintech

Investment in fintech is growing. According to BI Intelligence from Business Insidermore than $19 billion was invested in the space in 2015, and by mid-August 2016, there was already $15 billion invested. We can breakdown the motivation of investment into fintech into two characteristics: immense value and scalable opportunity.

Let’s explore the value that fintech poses to the financial services industry. Third-world countries are the innovation forefront of fintech. M-PESA is a Kenyan mobile money system that allows users to store money on a phone and send money to others via SMS. According to the report: The Long-Run Poverty and Gender Impacts of Mobile Moneyat least one person in over 96% of Kenyan households use M-PESA and the system has help lift 2% of Kenyan households out of poverty.

In Guadalajara, startup Kueski uses digital footprints of individuals to assess their credit score, a task that would otherwise prove challenging in Mexico where credit score is not readily available for a large segment of the population.

Another example would be Tigo Cash in Latin America. This digital financial services company currently handles more cash than a majority of financial institutions in the region. Third-world regions are adopting fintech services at a much more rapid pace than financial hubs like New York and London, and this is due to the immense value fintech can provide to people.

Millennials Are Fast, Early Adopters

In these financial hubs, fintech is creating cost savings and growth opportunities for both individuals and companies. Millennials are early adopters of digital financial services. One of the best examples would be in September 2016 when college student Sam Crowder held up a sign at a baseball game, asking his mom to send him beer money and included his Venmo account number. The sign was shown on national TV and and an estimated 3,000 people ended up sending him money.

Millennials are living in an environment where the collective experience is paramount to how consumers make decisions. If the fintech service is providing value, people will introduce the technology to family and friends. (For related reading, see: 3 Examples of What a Great Advisor Website Looks Like.)

Scalable Opportunities of FinTech

Fintech is creating huge scalable opportunities for businesses, and regulators are increasing their support in its ecosystem. The approval process of gaining required licenses with the UK’s Financial Conduct Authority is usually a long and complicated process, but Bitcoin company BitX was quickly approved. Regulatory bodies are beginning to recognize the immense opportunities fintech poses to businesses, and regulators are now supporting and strengthening the ecosystem rather than hindering it.

Another example is the European Union’s Directive on Payment Services (PSD2) creating an EU-wide single market for payments. This will actually pressure financial institutions to allow secure access to a customer’s online accounts for fintech companies. Even in the United States, the Treasury announced it will “start issuing special purpose national bank charters to fintech companies.”

B2B FinTech Is the Future

As the global marketplace begins adopting fintech services, the ecosystem is still evolving rapidly, and 2017 will be a year of changes. First we see the trend of fintech companies moving from B2C markets and entering B2B markets. B2C has proved to be extremely successful for fintech, with services like fast home loans and mobile money transfers. However, B2B companies like Hummingbill and Payoneer Escrow are predicted by industry experts to have revenues much higher than those of B2C companies.

B2C fintech is still the primary focus of most firms in the industry. Segments like InsurTech, robo-advisors, and digital-only banks are some of the biggest disruptors to the traditional financial institutions, but institutions are now viewing them as partners rather than threats.

Fintech presents the opportunity of immense economies of scale, with characteristics like mobile-first and keeping focused on the customer. It is predicted by industry experts that such companies will begin to undertake reverse mergers and acquire banks in order to better perform their services.

Haskell Garfinkel, the fintech co-lead at PwC, predicts that in 2017, robo-advisors will struggle. Such one-size-fits-all services have begun to saturate the market, with nine out of ten top asset managers in the U.S. having either already—or in the process of—developing their own robo-models. Garfinkel argues that the saturation of robo-advisors is creating herd-like algorithms that will diminish the allure of robo-advisors in 2017.

Rewards Programs Will Wilt

Garfinkel also predicts that 2017 will be the start to the end of rewards programs. Reinforcing customer loyalty with points or cash is becoming increasingly difficult in the mobile-first environment. Fintech services provided by well known brands have the potential to become the largest retail banks in the world, in part because they focus on what the client truly values: immediate gratification and contextual rewards. FacebookAmazonGoogle, and Ant Financial all have the opportunity to capture a majority of the financial services market, with services like digital wallets and instant money transfers being the key differentiators to their success. 

The fintech ecosystem is rapidly evolving, and 2017 will see the increase of partnerships and acquisitions. This ecosystem has brought immense value to both financial hubs and third world countries. The scalable opportunities of fintech don’t necessarily pose a threat to established financial institutions, but rather gives these institutions a chance to partner with start-ups and grow their business. However, if financial institutions choose to resist the shift towards fintech, they will be left in the dust. (For related reading, see: SnapChat as a Digital Marketing Tool for Advisors.)

-This article was written by Kirsten Ulveland and first appeared on Advisor Websites.

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