Fintech’s ‘Third Wave’ is Coming, and it Will Change Everything

Earlier this year, I wrote that “Fintech Is Hot, But The Demise Of Traditional Banking Has Been Greatly Exaggerated.” In that piece, I argued that the fintech startups that managed to eventually partner with traditional banking, rather than try to disrupt it, would be the ones to emerge victorious in the long-term. I received a fair amount of pushback at the time, particularly from fellow fintech startups who felt that their work would displace traditional banks and fundamentally shake up the status quo. Now, however, major players in the space are starting to come around to my point of view.

Jeff Gido, Goldman Sachs’s Global Head of Fintech, recently spoke about the evolution of fintech and why he believes the coming “third wave” of innovation will drive the long-term change that people have been predicting.

The “First Wave”: Responding to an Industry in Crisis

Fintech first started to come of age in the aftermath of the 2008 financial crisis. New regulations and changing consumer demands began to emerge as the world tried to pick up the pieces of the “great recession.” As a result, many of these changes made certain lines of business significantly less profitable for banks and other financial institutions, creating an opening for tech-enabled startups to step in and fill the void. This development, coupled with the changing demands of consumers and the democratization of big data, led to a fintech renaissance of sorts.

The “Second Wave”: The Big Players Take Notice

Gido believes that we’re currently in the “second wave” of fintech innovation, where incumbent players in the market are trying to leverage their considerable resources to remain competitive amongst startups. Everyone from American Express to Bank of America now have “innovation centers,” where they try to foster the startup mentality while leveraging their established brands and infrastructure.

The challenge, of course, is that no matter how hard they try, incumbents can never match the agility and risk appetite of startups. Corporate politics, changing strategies, and an overwhelming desire to protect the brand serve as hindrances to innovation.  Perhaps that’s why we’ve yet to see an established player do anything more than simply react to what startups have developed.

The “Third Wave”: Working Together for a Better Tomorrow

Almost every fintech startup wants to disrupt the big banks, but the problem is that it isn’t a fair fight. The U.S. banking sector is so entrenched and protected that challenging it from the outside is an exercise in futility. It’s highly unlikely that a startup will come around and pose a real threat to the likes of Bank of America or Chase anytime soon. If you’re gambling on fintech, either as an entrepreneur or an investor,  you’d be wise to remember that the bank is the house. You might have a few wins here or there, but in the end, the house always comes out ahead.

The smart startups know this and will use it to their advantage. In this coming “third wave”, fintech startups will partner with established players in the industry. According to Gido, “In a tougher fundraising environment, the go-it-alone strategy is difficult for many startups, and it can be costly for traditional financial services to build the technologies on their own,” he said.  ”That’s why we’re starting to see more of a two-way dialogue in this space.”

This sort of partnership has been at the center of BodeTree’s strategy for years now. We’ve found that partnering with banks, insurance companies, and everyone in between provides a “best of both worlds” advantage. Our partners can leverage our data, technology, and nimble development, while we’re able to leverage their brand and reach in the market.

This partnership model has enabled us to punch well above our weight in the market and turn would-be competitors into trusted allies. More importantly, however, it has enabled us to make a significant mark in a difficult industry.

Fintech is maturing, and investors and entrepreneurs alike are realizing that banks aren’t going away anytime soon. Wise companies don’t bet against the house in the long run. Instead, they learn how to take advantage of opportunities and work alongside the house. The best fintech companies will be the ones that figure out how to make banks better, not destroy them. The coming “third wave” will be the one that drives lasting change.

This post originally appeared on Bodetree.com by Chris Myers.

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