Is Consolidation in Banking a Response to an Increasing Threat?

The perception of FinTech’s effect on traditional banking varies across industry professionals – while some see it as a threat to revenues, others give an evaluation of the upward trend in essential financials in banking as a result of FinTech's impact.

The one thing professionals agree upon is the fact that FinTech has a substantial material impact on the financial services industry and is a factor in the decision-making process. One of the recent trends, most likely facilitated by the startup ecosystem, is the consolidation of efforts among the largest players in one form or another.

Among the earliest examples is the clearXchange case. In October 2015, in a joint prepared statement, the CEOs of Bank of America, BB&T, Capital One, JPMorgan Chase, U.S. Bank, and Wells Fargo said, Our customers want the ability to make payments to anyone, in real-time, making funds instantly available in the recipient’s bank account. To achieve this, we are combining our collective, bank-owned digital payments network (clearXchange) with our fraud, risk and authentication assets (Early Warning), to further ensure that our customers can send money, confidently, securely, and in real-time via their financial institutions. Some of the most powerful global banks consolidated their efforts to own the authentication process instead of outsourcing it to independent FinTech startups. The most powerful bank-owned alliance in authentication and the digital banking industry could be a sign that banks are looking to embrace their own opportunities together.

Zelle, an alleged Venmo-killer from America’s largest banks, is another case. Zella is the banking industry’s reinvigorated person-to-person payment service run by Early Warning. As reported by the WSJ, banks behind Zella plan to launch the new brand at a payments-industry conference in October.

Further, the R3 CEV blockchain consortium comprised of the world’s largest tech companies and financial institutions was recently reported to have filed a patent application for software within a new platform it calls Concord. As the WSJ explains, Concord is a platform that takes its cues from bitcoin, Ethereum, and other blockchain-based networks, but changes up key features and concepts to create a platform that takes the best of those other networks and makes it something with which banks will feel comfortable.

Dutch banks represent another important example. The growing attention and usage of digital services have led them to join hands in launching a pilot for a new interbank digital identity service this year. The service will allow a customer with an online banking account in the Netherlands to login to commercial and government service providers’ websites without the need for maintaining multiple accounts. The banks will be collaborating through the Dutch Payments Association and will be working with Innopay on a pilot which is promised to go live in 2016 and let participating customers use their online banking details to access services from the Dutch tax authority and an insurance company.

At the end of August, a consortium of Japanese banks in cooperation with Ripple Asia have announced that a new network that will use Ripple’s technology for payments and settlement. Japanese banks plan to build a system that offers cheap, round-the-clock fund transfer services by taking advantage of Ripple’s capabilities. The alliance is expected to initially draw about 15 members, including Bank of Yokohama and SBI Sumishin Net Bank. Participants will share transaction histories and other data via the system, which will adopt blockchain technology. The partners will employ a payment settlement system developed by Ripple Labs, which has formed a tie-up with SBI Holdings, which owns part of SBI Sumishin Net Bank. The service is expected to be operational as early as next spring, as reported by the Nikkei Asian Review.

Meanwhile, in India, ~50 companies including global banking institutions, like the World Bank, Deutsche Bank and Barclays, have expressed eagerness to be associated with the Centre's postal payments bank initiative. In June, the Indian cabinet had cleared the proposal for postal payments banks with a corpus of Rs. 800 crore. The proposal is to set up 650 branches of postal payments banks.

Although interbank initiatives are not exclusively comprised of large financial institutions, the goal is often to find a way to empower the banking ecosystem, to consolidate resources, knowledge and efforts to unify the infrastructure to offer competitive solutions to the ones startups were able to build. It does not necessarily mean that banks are trying to alleviate the effect of FinTech, but indicate a strong desire to strengthen the position in joint efforts and offer competitive solutions at the same time.