Retail Banking

The Evolution of the Bank-FinTech Narrative

Over the past few years, financial services industry stakeholders have been heavily involved with the startup community in one way or another – investments, incubators, accelerators, challenges, consortiums, regulatory sandboxes, etc. Startup-institution relationships (whether its Carrier-InsurTech or Bank-FinTech cases) have evolved from competition to a beautiful friendship, bringing out the best and accelerating innovation adoption. Significant capital allocations into strategic acquisitions are followed by the stage of active learning, and institutional players rapidly turning competition into the way to reinvent own operations and leadership.

“The relationship between banks and FinTech firms has evolved over a period of time from that of being competitors, to that of being collaborators. In 2018, we think banks will require a hybrid strategy that will be a combination of innovation programs and acquisitions. This will ensure that banks’ entire gamut of needs and objectives are met – short-term gains in terms of ROI; long-term bets on specific technologies; the FinTech product roadmap being in line with the bank’s own roadmap, etc.” – State of FinTech Report 2018, MEDICI

Spencer Lake – the former Vice Chairman of Global Banking & Markets at HSBC and currently the chairman of various technology startups including Dublin-based Fenergo, US-based Inforalgo & UK-based SPICA Technologies, and an advisor to more startups – believes it’s just a matter of time before banks start to buy technology companies as part of their efforts to automate more parts of their businesses.

“It is currently the case that banks are investing as minorities in many startups – usually those that they are using in the business. As time goes on, I can see that larger controlling stakes will be sought after,” Lake said.

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Source: MEDICI’s 2018 Global State of FinTech Report

While the first two stages of relationships are already a known history, the Hybrid Strategy is unfolding in real time around the world. Estimates suggest that ~50% of the world’s financial services firms are planning to acquire FinTech startups in the next several years. Moreover, 8 out of 10 institutions foresee making strategic partnerships with P2P lenders, digital money transfer platforms, and myriad other firms that are reshaping the business of money.

“Major financial institutions are increasingly looking at making FinTech acquisitions as a way of accelerating the adoption of new technology and innovation in their businesses. We expect this to result in a significant increase in investment and M&A activity in the FinTech sector over the coming years.”

“With this focus on acquisitions and investments, it is essential to adopt a streamlined process for executing transactions and to ensure that regulatory and reputational considerations – which could have an impact on the viability of a proposed transaction – are dealt with up front.” – Khasruz Zaman, M&A Partner at international law firm Simmons & Simmons

While the stories with innovation and investment arms are quite similar across the board, the open banking model is the one with the most significant transformative impact on the financial services industry and the end-user.

“Open banking initiatives bring technology at the forefront of finance by encouraging (sometimes even mandating) secure underlying account data sharing by banks. The main purpose is to enable third parties, mostly FinTech players, to utilize the open access to banking data, in order to provide value-add service applications that enable consumers to easier transact, save, borrow, lend, and invest their money.” – Milos Dunjic, Associate VP, Payments Innovation Technology Solutions, TD Bank

Europe and the US have different paths and experience moving towards the open banking model, with the next generation of banking platforms coming out of Europe due to the push from the regulatory bodies rather than an institutional strategy.

Aspects of open data access, transparency, security, and consumer experience promoted by the transformation Europe has embarked on have now started to produce important outcomes:

  • Spike in new market entrants – startup banks, payments entities, aggregator entities, etc.;

  • New collaborative business models between banks and FinTech;

  • Higher visibility and brand support for FinTech products and services through banks’ marketplaces;

  • Rise in FinTech as of banks’ distribution partners.

Overall, the face of banking is starting to look different in Europe with even traditional banks matching the new kids on the block in terms of embracing new business model paradigms. US institutions are not lagging in adopting the strategy either.

In the US, some of the largest banks took steps towards an open model launching developer hubs. In February 2016, Visa announced the launch of Visa Developer, a milestone to transform the world’s largest retail payments network to an open platform. For the first time in the company’s nearly 60-year history at that time, software application developers were granted open access to industry leading payments technology, products, and services by Visa.

In March 2016, Capital One launched the DevExchange Developer Portal, a repository for developer tools and APIs to enable developers to use the financial institution’s software building resources to create better customer experiences.

Later, in November 2016, Citigroup launched a similar platform – global API developer hub – to enable open banking. As Citi stated in the official press release, the release of Citi APIs marked the evolution of Citi’s technology to open architecture, with the aim to facilitate collaboration and partnerships with FinTech companies and consumer brands across the globe to benefit customers.

Through the global API Developer Hub, Citi granted developers access to APIs across eight usage categories, including account management, peer-to-peer payments, money transfer to institutions, Citi rewards, investment purchases, and account authorization.

In May 2017, BBVA kickstarted the launch of its open banking program by making eight of its APIs commercially available for the first time. The launch of BBVA API Market came after the Spanish bank spent more than a year working with developers and businesses to optimize the way the Open API service would be delivered, according to the announcement. Simple, the US digital bank bought by BBVA in 2014 has been one of the first ones to use BBVA API Market.

Wells Fargo and JPMorgan Chase also have an equivalent offering, signifying an industry-wide transition towards unbundling payment networks and banking platforms. With terms and actual use cases varying, open banking is an inevitable model for European and American markets.

“We are unbundling Visa’s full suite of products and services and giving developers open access to the underlying payment capabilities. We believe this will lead to the creation of entirely new commerce experiences with Visa technology integrated to enable greater security, scale, and convenience when it comes time to pay. When you add the ability to distribute those new experiences across Visa’s global network, you can see why Visa Developer will become the preferred playground for developers everywhere,” said Rajat Taneja, EVP of Technology at Visa, anticipating the change across the industry to come in the next several years.

To learn more about the evolving bank-FinTech narrative, where the industry has moved rapidly from competition to collaboration, to investment & acquisition, and eventually, to a Hybrid Strategy, download the State of FinTech 2018 (Executive Summary) free.

Elena Mesropyan

Global Head of Content, MEDICI Elena is a research professional with a background in social sciences and extensive experience in consumer behavior studies and marketing analytics. She is passionate about technologies enabling financial inclusion for underprivileged and vulnerable groups of the population around the world.