The partnership between fintechs and banks has often been told as a story of David and Goliath, a relationship that has been contentious at best and adversarial at worst.
Many industry observers predicted that the progressive culture and technology superiority of fintechs would topple the established banks. Fast forward to 2017 and stories about David defeating Goliath have been put to rest as banks and fintechs are entering a new form of partnership.
Fintech organisations have made huge investments in developing new products and services to make banking as frictionless and effortless as possible, driving innovation and providing better products to customers.
As an example: TransferWise, a peer to peer money transfer service is disrupting international remittances, by allowing users to send and receive international bank transfers in less than two days and at a fraction of the cost when compared to a standard banking service.
At the same time, fintechs have been held back in scaling their new propositions due to a lack of banking credentials, such as access to a larger customer base and expertise in managing regulation.
Established financial organisations have been burdened by their legacy processes and systems that are both difficult and expensive to reengineer. This has restricted a bank’s ability to adapt to the changing landscape and demand for inhouse innovation.
Banks have now realised that if they want to speed up their innovation they need to significantly increase their collaboration with fintech companies.
A New Relationship
Both fintechs and banks have realised that they are far better off as friends rather than foes. By collaborating, banks are able to launch new innovations and enter new markets at a price point and speed it would never be able to match in its own environment. In addition, fintechs gain access to banking expertise, regulatory know how and an expanded customer base.
Many leading banks are running startup programs to incubate fintech companies. London now has four corporate-sponsored fintech accelerators, intensive courses for start-ups that usually involve exchanging the start-ups’ equity for an injection of cash, as well as free office space and mentorship to accelerate growth.
MasterCard, Rabobank and Lloyds are providing mentorship, data and access to their systems’ software code as part of Startup Bootcamp, a global accelerator group that has launched a specialist fintech initiative near London’s Tower Bridge.
Other banks, such as Barclays are focusing on creating a global community for fintech innovation, including opening an accelerator in both London Shoreditch and New York’s Silicon Alley.
As banks continue to engage with fintechs for their business models, this will result in a need for internal “venture capitalists”, to conduct detailed business model assessments that identify which fintech firms are a good fit for their respective banks. Several banks have already established their own venture capital funds including Santander which has established a $100million fintech fund, called InnoVentures, to invest in or acquire new companies.
In conclusion, the early impact of fintech galvanised the banking sector into action. Having operated from a position of relative safety, behind robust regulatory walls building large value chains, banks have recently found their highly visible and commoditised products being undermined and eroded by a new disruptive and agile competitor.
While the relationship with fintechs was initially adversarial, fintech firms are now being considered partners rather than competitors. Through a new form of partnership, banks gain access to pipeline of new innovative products and services, while fintech organisations gain access to banking expertise, regulatory know how and an expanded customer base.
In addition, the new collaborative environment will enable fintechs to scale their business and connect the bank’s customers to an innovative environment and an ever increasing range of differentiated products and value-added services.
Long may the new relationship prosper.
Email : ian@IanAlderton.com