At the recent Sibos conference in Australia, the CEO of ANZ, Shayne Elliott, touched upon an old argument in the FinTech space – disruption vs. collaboration.
Initial perceptions of FinTech startups pegged them as standalone disruptors of the financial ecosystem. The consensus within the financial sector is shifting though and, as Elliott indicated, there’s a different trend starting to emerge across the board.
“The interesting development we’ve seen over the last 18 months or so is a shift to the view banks will work with FinTech – rather than FinTech replacing banks.”
Elliott also emphasized that although FinTech technologies do not necessarily spell the end of banking, “they can certainly spell the end of banks which don’t rapidly adapt, which have leaders lacking flexible mindsets, or which lose sight of what their customers value.”
Recent studies would suggest that both factions believe that the opportunity in collaboration is perhaps bigger than the opportunity in pure disruption, especially in the era of Open Banking that is taking hold in Europe and elsewhere around the globe.
Oleg Boyko, Chairman and Founder of Finstar Financial Group, a private equity firm operating in Europe, the US, Asia, Latin America & the CIS, believes that changes in consumer behavior, advances in cloud-based technology, the growing power and availability of mobile devices, and the emergence of data science are challenging the business models of traditional financial institutions. But Boyko also believes partnerships between FinTechs and banks will bring strategic value to both sides – the philosophy of partnership will add strategic value, insight, and management proficiency.
According to Deloitte, financial institutions are far more likely to collaborate than compete with FinTech, with some estimates suggesting that 82% of incumbent financial service providers expect to increase their FinTech partnerships in the next three to five years.
Partnerships can be equally beneficial for both sides:
Banks get the opportunity to increase revenue and provide more services without necessarily taking on additional risk or staff while providing a more advanced customer experience.
FinTechs get access to a loyal customer base and the opportunity to leverage extensive financial services experience while navigating the regulatory environment.
“Smart incumbents realize that they can benefit from the insights and agility of startups, while startups have understood that the scale, reach, stability and regulatory management of incumbents can be helpful.” — Mike Sigal, Co-founder of Upside Partners, a seed-stage investment firm
But not all partnerships are equal and below we’ll look at three interesting ways in which banks and FinTechs are partnering up.
This is a common approach where FinTechs license or sell their underlying technology to banks and other financial institutions. Typically, this would be a white label offering where the bank puts their branding on the product to offer an end-to-end solution.
For the bank, it means they do not have to invest in infrastructure or development costs for an in-house solution to offer a wide range of modern and innovative products under their own brand while still keeping complete control over the customer relationship cycle.
FinTech startups, on the other hand, get access to low-cost funding through a trusted partnership while knowing that the regulatory requirements will be taken care off through the bank’s infrastructure.
Jean-Philippe Vergne, strategy professor at the University of Western Ontario in Canada, suggests that banks must leverage the technology developed by FinTech startups to compete against big tech by using “licensing agreements, acquisitions, partnerships or direct investment” and also stated that currently, FinTechs present more of an opportunity for big banks than a threat.
OnDeck has a partnership with JPMorgan Chase and they recently created a wholly-owned subsidiary ODX to provide technology and other services to banks. Other examples include CurrencyCloud and FidorBank, Burling Bank and Akouba, and Kabbage, who has partnered with a number of financial institutions, including Mastercard, Scotiabank, and ING.
This is an especially interesting approach – as it would almost seem counterintuitive – where banks refer clients to relevant FinTechs to plug the gaps in their service offerings. But it is also a process that can help the billions of unbanked and underserved individuals globally to get access to better financial service offerings
It is particularly common in the lending sector where FinTechs are typically able to offer quicker customer onboarding, faster processing & approval times, cheaper loans, and more alternative methods of funding & lines of credit.
Payvision, a global acquiring network connecting banks, PSPs, ISOs, and their global merchants to simplify cross-border e-commerce through a single payment processing platform, formed a strategic partnership with a multinational Dutch bank ING in January 2018. According to Gijs op de Weegh, COO at Payvision,* *“FinTech companies and banks can solve the market and consumer challenges together, not replacing one another. They need to complement each other to create more efficient products.”
As a result, the referral approach can take one of three directions:
Outbound referrals, where banks refer clients who they are unable to serve, to non-bank FinTech startups who would have the infrastructure and products available to serve the customer.
Inbound referrals, where the FinTech company would onboard the customer into a specific product and then sell the asset to a bank for servicing and maintenance. Again, this is more common in the lending space where the FinTech would originate the loan and then sell it to a bank for maintenance.
Co-branded models also exist where banks and FinTechs cross-sell each other’s product.
For banks, there are a number of benefits to the referral approach. They improve the customer experience by plugging product gaps with outsourced FinTech services which will help to retain the customer relationship. Referral fees can also be an additional source of revenue.
FinTech platforms can benefit from a constant stream of business, and therefore revenue, through a bank’s loyal customer base. This can be vital for survival, especially for young startups.
One example here is WSFS Bank that uses LendKey’s platform to originate student loans.
In the UK, it is actually mandatory for banks to refer business customers who they are unable to serve with loans to alternative providers. The British Business Bank, for example, provides a number of referral programs, including Funding Options, Funding XChange, and Business Finance Compared for customers to shop around in order to get the best deal.
The more traditional approach would be for banks to purchase the rights to the technology or buy-out the company as a whole. But contrary to popular belief, this is not very common and acquisition activity has only picked up recently. According to a survey by London law firm Simmons & Simmons, 31% of banks and asset managers were expected to fully acquire a FinTech startup in 2018.
The benefit for banks is of course that they get exclusive rights to the technology which could give them a competitive edge, rapid expansion into new markets, and a new customer base.
For FinTechs, merging under an established bank’s ecosystem means access to additional funding for the further development of products and hands-on financial market expertise to guide product launches. It could also be a profitable option for founders looking to exit the market while making sure existing customers still benefit from products and services.
Examples of top banks acquiring startups include BBVA (Simple, OpenPay, Madiva), Goldman Sachs (Finance It, Final, Honest Dollar), BNP Paribas (Compte Nickel, Gambit), and JP Morgan Chase (MCX, WePay).
Conclusion: Are the opportunities bigger in disruption or collaboration?
The view that FinTechs exist purely to disrupt and compete against banks and other traditional financial institutions is a stereotypical and outdated one of this young industry’s existence. Granted, as we’ve seen, not all partnerships are created equal, but collaboration, in whichever form, is clearly more beneficial to both sides for future long-term growth, including customer satisfaction and retention.
The share of FinTechs with B2B offerings has increased from 34% in 2011 to almost 50% in 2016. Why is this significant? It means that startups are slowly moving away from purely providing B2C products (i.e., disruption) to partnering and offering products or services to established banks who continue to control the relationship with the end customer. In corporate and investment banking, B2B FinTech offerings are as high as 66%. Estimates also suggest that less than 12% of FinTechs are actually aiming for disruption and the disintermediation of client relationships.
The FinTech industry is therefore not one out to try and cause pure disruption and division in traditional financial services. A more accurate view is one of an industry looking to plug the gap in the service offerings of banks to ultimately provide a better customer experience by creating innovative and more inclusive products and services.
Boyko and Rob Morgan of the American Bankers Association (ABA), both agree that, in the end, what matters most is the customer experience, with Morgan noting “When banks and FinTechs pair together, you get the best of both worlds and customers can get the new innovative services they crave from a trusted partner.”
“Big Data, artificial intelligence, complex algorithms, mobile, and cloud computing, AdTech – it is all combining to create a revolution in the financial services sector. After this revolution financial services will be available to far more people than currently, in many more markets, be more affordable, be far better tailored to the individual consumer, and be an infinitely better, smoother, more convenient experience for customers.” — Oleg Boyko, Finstar