Is the financial services industry headed towards a major upheaval? If the rise in the number of fintechs popping up over the last several years is any indication, then the short answer is yes. But there is much more than meets the eye when it comes to new technology in the financial services sector.

Fintechs, emerging financial technology companies, are innovating and continuing to break dominance in the way we lend and borrow money, pay for goods and services, and transfer funds between accounts and overseas. And growth in this sector doesn't show signs of slowing any time soon. Investment in fintech is projected to remain strong, and the demand for it among savvy consumers and forward-thinking businesses is expected to rise.

According to a report published by KPMG and CB Insights, fintech funding reached $2.9 billion in the third quarter of 2016 alone. This upward trend is being fueled by the need to solve the changing requirements of today's digital consumer and adapt to the way they prefer to transact.

So what's next? What's needed to thrive in the fintech revolution? And where do opportunities exist for those looking to break into the world?

In short, entrepreneurs and business leaders will need to take a customer-experience-first approach to innovating in this sector and look at how emerging technology can play across the industry.

Forecasting customer need

Today's most successful fintechs are tapping into the power of technologies like blockchain and artificial intelligence to unbundle traditional services and allow systems to collaborate that haven't traditionally been able to -all to create a better experience for the user. They're introducing innovative solutions ranging from payments and lending to robo-advisor services and trade data management. And this ability to collaborate and bridge the gap between the palate of services businesses and consumers need is one reason fintechs are thriving, primarily because it's been a difficult area for financial institutions to play a role.

"Companies that focus on application programming interfaces (APIs) are essentially allowing different players in the fintech ecosystem to collaborate, allowing for greater integration of the services different organizations can offer," said said Joe Carella, assistant dean, Eller Executive Education, University of Arizona. "They're focused on making the consumer experience simpler and more convenient. I think there's going to be a lot more activity in the area of APIs and it's where fintechs have a real opportunity to make a difference in the industry."

While traditional financial institutions have been hesitant to collaborate, non-financial players are beginning to partner with fintechs to open up more specialized services to their customers. For example, Sage, the UK-based business accounting software provider, has created collaboration points to add services like employee benefits, payments, workforce management, and even business financing.

"APIs that can sit in the middle of those who provide capital and those who have access to the customer can be very successful," Carella said. "This is where I see a big opportunity for fintechs."

Advancing the customer experience

At the root of the fintech and API revolution is the customer experience. Technology has changed the way consumers do things and many of the legacy systems behind the financial services industry have failed to keep up.

"The primary driver of fintech innovation in the consumer space is around very targeted product design and in some cases those products are much more granular than a one-stop-shop offering in the incumbent," said Chris Curran, principal and chief technologist for PricewaterhouseCoopers US. "It's less about any specific emerging technology and more about targeted product design and looking for gaps in existing offerings."

Emerging fintech players are gaining traction because many consumers, particularly millennials, believe their product offerings are more intune with their needs than the traditional banks and financial institutions. While technology is a big component, customer experience is the foundation underlying fintech success.

Expanding and consolidating

As fintechs and traditional financial institutions continue to navigate how blockchain, mobile payments, artificial intelligence, and product design all fit into their game plans, many predict investment and merger and acquisition activity to pick up in this arena.

"Most of the large incumbents are looking at the fintech startups as innovation opportunities," Curran said. "So they are going to be acquiring these opportunities and risks as well."

In addition to acquiring fintechs, other institutions are building partnerships with emerging fintechs even supporting their growth and development.

"One forward-thinking financial institution is Barclays," said Carella. "They've created Rise, a global community of fintech innovators, and Barclays Accelerator to help fintech startups be more successful in the development of their business model. By taking a more proactive approach, they are able to understand where fintech is going, be better prepared to integrate some of these innovations in their organization, and prevent rather than cure future challenges."

Despite the growth and early success, the fintech landscape is not without its challenges. While they aren't encumbered by legacy systems and mindsets, they will have to think about regulations, the global scale of traditional financial institutions, and educating consumers on using complicated technology.

"We are going to continue to see a lot of energy around artificial intelligence and blockchain, but as technology gets more sophisticated, it becomes harder to explain," Curran said. "Using the robo-advisor example, some customers might be willing to accept a certain portfolio mix recommendation as a great idea, but others will want to know why a certain recommendation is being made. That's going to be one of the barriers to blockchain and artificial intelligence, is transparency into how they work -and that is going to be a challenge for both incumbents and fintechs."

Published on: Jan 10, 2017
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.