From Competition to Partnerships: Banks, FinTechs, and NeoBanks

Banks and FinTechs have had a tricky relationship over the years from competing for the same consumers, and at other times, leveraging each other's strengths. However, in recent times, the mutual acknowledgment of the need for the other has grown and become more evident.

One of the most innovative and groundbreaking segments in financial services is that of digital-only banking or neobanks. Neobanks present the financial services ecosystem with an exciting proposition for growth through partnerships. It allows the digital transformation of banks without the need for large investments or acquisitions, and at the same time, neobanks can gain access to capital and larger customer bases. Today, neobanks partnering with financial institutions is an increasingly common phenomenon, and this is only expected to increase.

Trends in funding, investments, and M&A

Heavy reliance on legacy systems and the lack of an innovation culture presented banks with a challenge from FinTechs. They had solutions that seemed to threaten the very existence of banks with their cutting-edge technology solutions. Their technology made bank operations seem slow and inefficient. Many assumed that they had the potential to take away the customer base of banks, dealing damage to them. So, traditional banks began to do one of two things – either collaborate with existing startups or develop the technology themselves, in-house.

However, the latter wasn't as common. A report by Morgan Stanley found that only about 7% of banks were involved in the development of in-house technology solutions. The majority of banks, instead, saw more value in either partnering or investing in FinTech companies.

As a result of this, FinTech startups have attracted high-value deals for several years. MEDICI data shows us that the global FinTech community raised more than $61.86 billion in a combination of VC/PE investments and acquisitions/buyouts by any player in the first half of 2018, and this number has only increased since then.

Breaking this down, we find that the FinTech space saw some uptick from 2017 and in 2 ...

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