Citigroup hit the headlines last week with the launch of its brand new initiative, Citi FinTech. Essentially an in-house start-up, Citi FinTech comprises a group of select employees who have been cherry-picked from across the wider business. Together, they will focus on developing prototypes of solutions, such as facial recognition for mobile banking.
The division’s newly appointed CEO, Heather Cox, has even coined a new phrase to mark the launch. She talks about ‘fintegration’ as a way for big banks like Citigroup to win back customers who’ve been lost to the emerging breed of fintech start-ups.
It makes a lot of sense for Citigroup to tackle this challenge head on. The fintech industry is on the march; investment in the sector was up 67 percent in the first quarter of 2016 when compared with the same period in 2015. A new generation of digital disruptors are eroding the market share of the established banks, particular when it comes to services such as payments and lending. Some have built big names and reputations for themselves in a relatively short space of time.
The crux of the problem is that – while fintech start-ups were borne into the digital age and have been able to specialize in profitable service offerings – the establishment remains encumbered with large product portfolios as well as complex, legacy infrastructures. At the same time, it has expanding regulatory obligations and slow-moving internal processes to manage.
Citigroup’s response to this problem is to replicate the fintech industry’s start-up mentality. But will it work? Despite all the hype, the fintech industry isn’t foolproof. The challenge of building technology platforms from scratch is they are hard to scale. If it’s to be successful, Citi FinTech will need to strike a balance that few others have achieved: be nimble enough to develop services that people want while, at the same time, scalable enough to offer multiple services to a mass market.
Other banks have chosen a different path. There are many examples of the established players opting to buy in their fintech expertise rather than take the time and effort to build their own. There’s little to suggest these types of acquisition will stop any time soon.
Meanwhile, JP Morgan’s interpretation of ‘fintegration’ doesn’t fit either the ‘build’ or ‘buy’ mold. Instead, it is taking more of a hybrid approach to developing innovative new services, by striking partnerships with specialist fintech firms. Bank of America is reported to be taking a similar approach.
So which approach will save the day for the banks? Only time will tell if the financial establishment is better off building or buying in its fintech expertise, but it’s certainly going to be interesting to watch how this new era of ‘fintegration’ unfolds.