If you think the biggest innovations in fintech come from startups, then in many cases, you’re probably right. Despite being larger and better funded, Fortune 500 financial companies often fall short of their small and scrappy competitors that bring to life the “less is more” concept – operating at lower costs and using smaller teams and minimal regulation to their advantage. But traditional financial companies have some skin in the game too. Let’s take a look at both sides.

Startups’ head start

Fintech startups can do more with less, largely because they lack the legacy infrastructure and cumbersome compliance issues that larger financial institutions face. Small teams can focus on rapid prototyping and minimum viable products to cut down time between idea generation and product launch, thus resulting in speedy go-to-market strategies. Additionally, to increase speed and reduce costs, they may debut stripped down versions of their apps and software, waiting to add features to future versions as they become readily available. This process goes against the culture of large financial companies where the focus has traditionally been put on perfecting a product before launching it.

Startups usually concentrate on one area of the financial business and do it well, whereas most Fortune 500 financial companies have diverse lines of business. As a result, large financial companies are fending off assaults on their bottom line from multiple fronts. For instance, PayPal, Stripe and Square are honing in on payment processing on one side, while robo-advisors like Betterment and Wealthsimple are looking to take over a chunk of the wealth management sector.

And it doesn’t stop there. The latest fintech players have ventured into the lending industry where companies like LendingClub and SoFi attack the consumer lending market, and Kabbage and OnDeck Capital look to become leaders in small business lending – a traditionally under-served market due to the high cost of processing loans. Fintech solutions not only make this sector profitable but bypass the banks and institutions that were once necessary to provide lending.

Keeping up

Changes in consumer behavior have made it hard for Fortune 500 companies and larger financial institutions to keep up with an increased demand for fintech solutions. So how do large-scale financial institutions strengthen their technological armor to keep from falling behind? Increased investment in tech is a natural step, and one that many institutions are already taking. In a 2016 SourceMedia survey of chief intelligence officers at banks, 70% said they would be spending more on tech with one third upping their budgets by more than 10%.

But dumping money into tech can’t be a blind effort. Traditional financial companies should first identify the lines of business that are most important to their organization and channel tech dollars toward not just protection but also improvement. Doing so brings a better product to current clients and presents the opportunity to attract more. The good news is that this is already happening — whether it’s through innovating internally, partnering with or investing in fintech companies, or by acquiring the most promising fintech competitors.

In-house innovation

While most big financial companies have multiple plans for combating their startup competition, one key strategy is in-house innovation – which begins with hiring and developing internal tech talent. As you might have guessed, the benefits of this strategy include having more control over the innovation process and owning the IP. Citigroup, for example, has developed a small team that works like a startup to help bolster its consumer banking sector and quickly launch new products. Meanwhile, Fidelity has launched its own consumer-focused digital advisory solution, Fidelity Go, and its own technology platform for advisors, Wealthscape.

Many banks are also trying to counter payment processing companies like PayPal and Square by creating their own alternatives. For example, a few years back, some of the biggest banks in the U.S. came together to create clearXchange network, now known as Zelle, a platform that allows consumers to transfer funds from their bank accounts to another person’s bank account using a mobile device.

Partnering

Partnering with fintech companies is another popular strategy that Fortune 500 companies are using to stay ahead of tech trends. According to a 2017 report by PricewaterhouseCoopers, eight in 10 financial companies see themselves making partnerships with fintech companies in the coming years.

These partnerships with fintech players may vary depending on the company. Some, like Santander, have fintech venture funds that they use to take minority interests in emerging companies. Others, like Fidelity, partner with emerging fintech companies through incubators and accelerators.

Citibank invited fintech companies into their orbit by setting up an API development hub for its mobile banking app, which saw more than 1,400 developers sign up in the first three weeks.

SOURCE