Every action has risk, and banks are traditionally averse to risk, and therefore have been relatively slow to adopt new technologies, new practices, and new markets. This risk averse / change resistant position is the entire reason why fintech has emerged as a distinct sector, and why fintech challengers have been able to take major slices out of the banks’ core services. Money transfer, business lending, factoring, already heavily targeted by fintechs, next in line are mortgages, insurance services, and inevitably, consumer lending, already nibbled at by P2P systems.
The most imminent risk for banks isn’t the replacement of their brands by challenger banks, that is some way off, if it happens at all. The most pressing and immediate risk is the erosion of their customers satisfaction by the banks failure to service their own customer base with credit products.
When a bank declines their customer for a loan, forcing that customer to go elsewhere, they don’t just lose revenue; they lose good will. Multiply that by millions of refused loans a year, and it becomes clear the banks are not just wasting the opportunity to provide pro table services; they are sowing the seeds of their own long-term obsolescence.
The mechanics of change within banks is a major obstacle, in terms of tech especially, which is why the simpler and fundamentally more common sense approach is to partner with fintech companies that have proven themselves to be of an equal or better reputational standing.
Santander recently announced a UK partnership with Kabbage, and have been in strategic partnership with Funding Circle for several years. Both of these are US based and focused operations.
US based Regions Bank, a component of Regions Financial Corporation, with $126B in assets; last month announced an agreement with Avant. This may be particularly significant, being the first of its kind in the unsecured personal loan space, and it could open the door, if not the flood gates, to high profile matches that provide win win win scenarios. The third win being the actual customers.
The advantages for both parties in these kind of partnerships are clear, one provides the customers, the other provides the product / service experience, and they either share the risk and revenue or work out the details accordingly. It also opens up some interesting joint marketing opportunities, if they are able to let go of brand singularity and see it from the customers’ perspective that is. Collaborative marketing campaigns between banks and fintechs would spread costs and create additional consumer notice and interest, a true signifier that things have changed. Brand preciousness will have to be overcome first of course, and banks would have to be publicly open about the benefits of the partnerships, which is actually a huge opportunity, rather than a failure on their behalf, once the nettle is grasped.
The delay in partnerships of this nature has been understandable; banks were never going to expose themselves to reputational risk by partnering with ‘upstart fintechs’, no matter how efficiently they were seemingly able to deliver. This is only slightly ironic, given that the fintechs could easily claim to risk brand reputation against the less than spotless UK banks, which have, lest we forget, successfully racked up fines in excess of £50 billion since the last financial crisis they were at least partly responsible for creating. Not many fintechs could claim that dubious honour. Nor have many fintechs been under criminal investigation from the US department of Justice, or been involved in massive and systematic rate rigging. Reputation wise, the banks have got away rather lightly considering the borderline criminal actions perpetrated under some of their brands.
The truth is, the likes of Avant and Funding Circle are not ‘fintech upstarts’, they are actually major companies in their own right, with proven track records in both nance raising and client facing services. And given that they are now turning their attention to the UK market, one can only assume the next strategic bank partnerships will be the ones that turn millions of ‘computer says no’ loan applications into millions of satisfied shared customers. Of course some of the banks are frozen to the spot, not quite being sure of which way to turn, a situation which affords them a few more years of grazing before the challengers give up on collaboration and go straight in for the kill, which will inevitably occur sometime around the time the banks are required to open their APIs and therefor lose one of their key strengths.
Is a happy shared customer better than a dissatisfied exclusive one?
With the direction of the market clearly visible, the banks response to this simple question may be the differentiator and perhaps the determining factor for their longevity and survival. Inevitably some will move with the times, and some will wait and see what happens. The ones that don’t move from their position are sooner rather than later going to run out of grass. That’s pretty obvious, and when they finally raise their bovine heads to look for a partner, all they’ll see is rather smug looking lions.
We spoke with 11 leading fintech-related companies, and we found out that three main topics were dominating in their answers: Partnership, PSD2/APIs and Disruption. We highlighted them in different colours, to show more clearly the recurring patterns.
Hold tight, it’s a long ride, but worth reading. Now let’s see what they have to say.
Per Polland, Head of Strategy:
Many Fintech zealots would have you think the banks’ days are numbered. That a new age of financial services is on the horizon, soon to eclipse the high-street giants that have ruled the industry for centuries.
This is naïve. If the banks are smart, they won’t be going anywhere. They know that consumers don’t want to use 30 different providers to cover each niche of their financial lives. Just like always, they want a one-stop shop. But consumers are getting fed up with the products banks are stocking. With better offerings available elsewhere, banks are in danger of leaking customers. Today’s tech unicorns and financial disruptors could be converted into mere add-ons and plug-ins. This is the app store bank.
Your average bank provides many services. Current accounts, savings, loans, business loans, overdrafts, factoring, foreign exchange, to name a few. But for each offering, there’s now a new player that does it better. The Fintech space has grown so saturated, that there’s often multiple providers ‘disrupting’ a single product line. It’s an attack on all fronts.
Banks have many options of response. The first would be to build their own version of the disrupted service, either in-house, or through tech accelerators. This is a gamble, and to date, hasn’t worked. The second option would be good old fashioned acquisition – make the competition a (likely expensive) offer they cannot refuse. We’ve yet to see a fully-fledged, high-profile buyout in the fintech space, but don’t rule it out. However, acquisition has a tendency to dull that innovative edge that makes a business special.
The third option, which is already happening, is partnership. The best example of this would be OnDeck’s deal with JPMorgan. This is the golden balance between aggression and conservatism, and is in the mutual interest of all parties. Everyone’s a winner.
Fintech companies usually have better UX, better pricing, VC-backing and a cool image – almost everything you need for a successful service. Almost. The banks still have the most important component of all – millions of customers. Without an active base of paying customers, fintech startups are dead in the water. A bank can provide a near-limitless pool of devoted customers, whilst simultaneously legitimising whatever exotic Fintech service the average consumer doesn’t quite trust yet.
Partnership then makes perfect sense. Both parties benefit, fintech companies provide the product, banks provide the customers. When this starts happening on mass, the app store bank will emerge. Need foreign exchange? Here’s Transferwise. Embedded API, co-branded design – you think you are still on the bank’s site, but you’ve actually been transferred to a fintech platform run by a team of young devs in Estonia.
Imagine if the iPhone was a bank. Yes, Apple provide their own native apps. But they also want their users to be able to access third party apps. If they didn’t, we’d all be using Android.
WhatsApp is arguably the best messaging service on the market, and Apple choose to house it on their system – despite having their own messaging app. Why? Because it’s mutually beneficial for Apple, WhatsApp and the customer. This app store model is perfectly suited to financial services. It’s a logical progression for banking.
There is a major problem here though. Under this model banks’ revenue per customer would drop significantly. The reality might be that banks are stuck between a rock and a hard place – less revenue per customer or no customers at all. The highest margin providers will be targeted first.
Of course, there are variables to the app store scenario. Will the fintechs keep their brand? Or will they be absorbed and anonymised, assimilated into the banking machine and forgotten forever? Car manufactures have been doing this for decades. It looks like an Audi, but really it’s Volkswagen under the hood. There’s also the delicate matter of exclusives.
A phrase that gets used a lot in Fintech is the ‘unbundling of banks’. If this has already happening, then the app store model is phase 2 – the re-assembly of banks.
Raj Singh, UK Managing Director:
Incumbent banks recognise that to retain their large customer base they need to innovate, and likewise challenger banks inherently believe they need to be substantively different to grow market share.
Having a nice front end user experience will get you so far but ultimately if you don’t offer an intelligent back end and a well thought out customer journey you won’t succeed.
This is where the right fintech solution can add real value. Banks need to ask themselves ‘which of my products are comparatively weak in terms of customer value proposition and which represent the greatest growth opportunity if I had a trusted and capable partner’?
Now is the time for consolidating positions. The challenger and disruptive fintechs are consolidating market presence. Establishing themselves, stabilising growth, and moving towards mainstream. The incumbents, specifically banks, are in a window of opportunity. The new fintech companies emerging are, generally speaking, not attempting to disrupt them, they’re attempting to enable them in some way.
If they don’t take the opportunity now, in the next wave of disruption, banks will be disadvantaged not just by new fintechs, new fully licensed challenger banks, and also the established banks that took the opportunity to partner and made themselves more competitive. Therefore it’s realistic to say that any of the major consumer facing banks that don’t take this window of opportunity to find service delivery partners will start to fall behind year on year.
Fintech Week responds
Luis Carranza, founder:
All banks at this stage should consider themselves challenger banks if they want to remain ahead of the curve.
Banks usually deal with numbers, data and value, often times at the expense of service. As more services go mobile, user experience and micro context (taking into account time, location and other activity) are vital in designing a please customer experience (CX). Banks should be paying attending to start-ups that create simple intuitive interfaces that simplify things such as remittances, banking, mortgages, etc… Complacency is the opposite of innovation. Banks don’t need to innovate as much as they need to be less complacent.
Tom Blomfield, CEO:
At Mondo, we’ve written before how we believe that the bank of the future will be a marketplace, where customers have freedom to choose across a range of products and services.
However, I don’t believe that any of the existing banks will be able to make the transition to this new paradigm.
At the heart of the problem is a culture of “customer ownership” and cross-selling. Typically, banks aim to attract young customers with loss-making introductory offers like interest-free overdrafts, student railcards or a cash lump-sum for switching. Banks then feel like they “own” the customer, and proceed to cross-sell higher-profit products like credit cards, mortgages and loans.
While the headline opinion piece talks about some early bank-fintech partnerships, these have generally been revenue-additive. That is to say, banks will refer customers who are outside their risk appetite to other fintech providers, in return for some share of profit. If Santander’s risk models won’t let them lend to a small business, they can earn revenue by send that business to Funding Circle. As you say, a win-win-win.
But this highlights a problem; what if the partnership opportunity is revenue-destructive? Banks could have implemented a Transferwise competitor years ago, but they would have reduced their foreign-exchange revenues by up to 90%. Instead, they rely on customer inertia to cross-sell uncompetitive products.
The banks have spent the last 50 years building up a cost-base that relies on a certain level of revenue. Thousands of branches and tens of thousands of staff aren’t cheap to maintain. Ancient IT systems are costing each of the major UK banks more than £1bn per year.
Meanwhile, the shift to marketplace banking will lead to lower revenues, at least in the short-term, as consumers benefit from the increase in transparency and competition. That’s why I don’t believe that any major bank will successfully make the transition; they can’t stomach a 50%+ decline in revenues, and they they can’t cut costs quickly enough.
In many ways, starting from scratch is an easier approach. Designing systems and processes so that everything just works means that Mondo can operate with far fewer staff. The fact that everything is delivered through a single “channel” – a smartphone – reduces cost and complexity. The same goes with focussing on one product – the current account. As a result, the operating model is dramatically simpler and cheaper to run. And the benefit to consumers is enormous. If you have some money left over at the end of the month, imagine being able to move it into a P2P lending platform with one click. Or being able to choose a loan from any one of a number of providers based on your previous spending habits and income. If you want to transfer money abroad, you should be able to choose which provider to use based on your own priorities, and then move money with a couple of clicks.
Integrating with innovative financial services and technology providers is an obvious step to giving customers control over their money. Instead of thinking we “own the customer”, Mondo users will have the power to choose, based on price, convenience and customer-service.
Just Loans Group responds
John Davies, CEO:
In 2012, it was clear that traditional banks were under pressure to rebuild capital buffers and were either unwilling or unable to provide SMEs with the finance they needed.
Additionally, a move towards centralisation and continuing dependence on clunky legacy systems meant they weren’t best placed to serve this market. A range of alternative lenders moved into this space and the smart ones started using new financial technologies to make more informed lending decisions and offer the seamless access to finance SMEs needed to invest and grow.
For example, our proprietary scoring system is a major competitive advantage as it drives a comprehensive underwriting module providing a wide variety of current and historical data points, many of which are not used by traditional banks or other lenders. This provides extensive insight into the propensity for both the Directors and businesses to be successful in the future.
Traditional banks are well aware of these types of initiatives and innovations but it will be customers calling the tune. They will demand faster and on demand services and won’t be prepared for the all the friction that comes with waiting weeks for appointments and often even longer for decisions.
Banks will either get left behind, partner or acquire.
Pete Steger, Head of Business Development:
There’s a significant transformation happening in financial services today that is changing the interaction between financial technology companies and banks.
At Kabbage, we’re focused on collaborating with the forward-thinking banks to provide them with the technology, data expertise and automated customer experience they need to better serve SMB customers and consumers. In early 2015, Kabbage began licensing its platform technology directly to financial institutions – including ING in Spain, Kikka Capital in Australia, and now Santander UK – to accelerate lending to their SMB and consumer segments, while providing a data-driven end-to-end customer experience.
I think opportunities for both fintechs and banks to partner are massive, and we are going to see more and more partnerships in the coming years. It is my opinion that banks aren’t going anywhere, but their ability to adopt new technology will start to dictate the future of the financial services sector. We may see banks more as brands and an infrastructure through which technology and third party products are adopted and configured to that bank’s particular goals for its customers.
Consumer Finance Association responds
Russell Hamblin-Boone, CEO:
Technology has radically reshaped how we consume information and this revolution is being felt in the banking sector.
Bank branches all over the country are closing, as people choose to bank online and through apps that fit their lifestyles. The traditional visit to a branch is becoming a thing of the past. The growth of mobile banking has been dramatic, but it would not have been possible without fintech companies taking up the challenge in the first place.
Short-term lending was one of the first sectors to pioneer the democratisation of access to finance, which was part of a move away from the mainstream banks that accelerated post-credit crunch. In the past you would typically only get a loan or save in a bank you held an account with. But emergence of the FinTech sector means anyone can now get a loan or deposit savings from a wide range of sources, from short-term loans to P2P. Atom, the first digital-only bank is attempting to replicate in high street banking what Amazon did to high street retail outlets. It is early days and banking is a different concept, but changes have begun and the genie is out of the bottle.
The mainstream banks were initially slow to enter the FinTech market and are now running to catch-up on technological developments. For example, in the short-term high cost sector, firms have pioneered digital analytics to help make lending decisions, which ensure credit is affordable beyond a basic income and expenditure calculation. Short-term lenders are driving innovation in credit reference agencies, including the use of real time customer credit information. Lenders are now able to profile their creditors and anticipate future behaviour using advanced technology. These companies have also been instrumental in using social media to directly engage with their customers at times convenient with them.
Huxley Banking & Financial Services responds
Daniel Woodgate, Principal Recruitment Consultant:
Fintechs are motivated to collaborate with banks from a very early stage in order to generate revenue, such as trading systems and big data centric businesses.
Likewise, banks are offering fintechs invaluable springboards through accelerator programmes and incubators, such as Fintech Innovation Labs or Level39 to leverage the banks’ market expertise, networks, and infrastructure and also funding and mentoring as many sole ntechs operate with a great idea and little business experience. Of course, banks are utilising fintech services and platforms to enhance their own capabilities, or investing through venture capital avenues.
On the other hand, some fintechs may not want to fully collaborate with banks as they are intending to disrupt and gain market share. Many payments and personal finance fintechs, digital banks and lenders are looking to tap into the individual consumer base, offering an improved consumer service, cost-savings, and improving functionality at a much quicker rate than many of the banks can match.
This collaboration would stem from the reality that fintechs are typically more agile to evolve their capabilities and services to meet consumer expectations. Banks are less able to do so due to their size and speed to adopt new technologies; they instead may look to buy the capability to stay competitive, generating a win-win scenario.
What’s exciting for the industry is that this collaboration is driving and supporting the financial services domain to evolve. From a staffing perspective, it’s helping to battle the well-documented ‘brain drain’ of technologists out of the banking and finance domain seen in recent years across the globe. Fintech businesses are able to boast the best of both worlds, the culture and technology focus of startup and tech worlds and also offer access and exposure to collaborate with some of the most successful banking companies in the world – a very attractive proposition for many entering, working or considering leaving the industry.
State Street Global Exchange responds
JR Lowry, EMEA Head:
We are in a high-change period within the industry, fueled by technology innovations, new regulations, disruptive business models, and changing consumer expectations.
These shifts have sparked a vibrant FinTech environment feels reminiscent of the Dot Com era of the late 1990s. So it’s no surprise that many members of the financial industry – including ourselves – are embracing innovative fintech start-ups, through acquisitions, investments, partnerships, and involvement in industry accelerators like London’s Level 39. We view the FinTech start-ups as a font of fresh insights and talent, as well as a credible source of innovations to help bring new and enhanced services to our clients.
Konstantin Rabin, Head of Marketing:
How can third parties facilitate the growth of banking?
Everyone is talking about banks losing their positions in a decade from now. This might be true and I do feel that banks aren’t going the right way. However, it does not necessarily mean that banks are going to be overtaken by fintechs. Perhaps, there is a way for fintech and banks to co-exist and to actually improve each other’s services. Let’s see how this can become a reality.
Look at operating systems.
Let’s draw a parallel between a bank and, say, Windows OS. Microsoft supplies various hardware vendors with software that gets pre-installed on laptops. However, this is not Windows that makes the laptop useful, but the software you can install over it and numerous websites you can access. Even though Microsoft develop many other applications and programmes apart from the operating system, they still cannot satisfy customer needs in every single aspect. This is where third party developers come handy with their products.
Now let’s look at banking. Banks can certainly supply some powerful basis for the customers. They can perform initial KYC, accept cash deposits, execute cross-border transactions and so on. However, can they design outstanding PFMs? Can they provide competitive conditions for financial trading? Banks cannot overperform in everything. Hence, a fintech startup that is focused on a certain niche is more likely to offer superior services.
The problem is that currently fintech companies and banks are not interconnected. This creates a Lose-Lose situation. Fintech companies don’t get a larger client base, while banks cannot offer an added value and certain services to its clients.
API is the answer
The main issue with banking is that financial data is held under the lock and key. The good news is that this is about to change due to Payment Services Directive 2. In just three and a half years from now (at most!) there should be an open banking API standard. What does that mean? It means that any legitimate fintech startup will be able to access banking data and use it. Also with an API, banks can integrate various third party applications much faster and easier.
Just imagine you are able to customise your online banking experience in the same way you are able to customise your Android device. Isn’t that awesome?
The future is here
Even though an open banking API standard is scheduled to come soon, there are various commercial banking API vendors on the market already. As it happens with software, commercial vendors often overperform open source solutions. One of such solutions is Kontomatik banking API. Integrating a banking API to a financial organisation makes it possible to perform KYC online, get a precise profile of a new client and design new products.
SpareBank 1 responds
Christoffer Hernaes, Vice President of Strategy and Innovation:
Can banks and fintechs collaborate in a mutually beneficial way?
Now fintech has become one of the hottest subjects in business, incumbents have started seeing fintech as an opportunity rather than a threat. As a result, the fintech startups are now approaching the incumbents they were once set out to disrupt as potential partners. The opportunities are there. Fintechs are agile and innovative while banks have consumer trust, familiar brands, large distribution networks and a well-equipped war chest. Collaboration between banks and fintechs should therefore be a win-win, improving the incumbent’s capacity for innovation and giving fintechs scale and route to market.
As a result we see weekly announcements of banks collaborating with fintechs. However, there is no one-size-fits-all recipe for collaboration.
Accelerators and incubators have proven to be a popular way for banks to engage with the fintech community. Banks are hosting their own accelerator programs such as Barclays Accelerator powered by Techstars, or collaborating with mentors from accelerators such as Level39. This requires no further commitment, and can function as an early stage listening post for banks curious of what’s going on in fintech.
Corporate venturing reminds us of the early 200s when everyone had to have their own corporate venture division. Fortunately, we have moved past that, and banks such as Commerzbank and Santander are hosting their own fintech funds, while BBVA allocated $250 million in Propel Venture Partners, shutting down their venture fund in the process. Other banks and financial institutions are also considering investing in fintech venture funds such as Orange Growth Capital and NFT Ventures.
Acquisition. For a more strategic investment approach, acquisitions or direct investments are a viable solution. BBVA has demonstrated this by going on a spending spree with the acquisition of Simple and Holvi in addition to investing in challenger bank, Atom.
Collaboration challenges. When it comes to non-structural collaboration, one of the common challenges is to decide whose brand will be facing customers, and who will be responsible for middle of ce and back-end systems. This is where things start to get difficult. It is therefore important to agree on at an early stage to avoid wasting time on never-ending discussions later on. Who will maintain the customer relationship? Who will have ownership of customer data? Who will be responsible for compliance? Who will receive origination fees, who will fatten up their balance sheet? These are just a few of many questions that will arise, and need to be treated individually.
For CBW Bank it makes sense to provide the pipes and plumbing for Moven in the US, while Moven takes on the white label position in other markets. Marketplace lender Lending Club have Webbank in Utah as a partner for issuing loans, providing a national deal flow to a mid-sized regional bank, again proving that there is no single defined recipe for collaboration.
Open APIs and banking as a platform is the future, it’s needed to industrialise the collaborative environment and create a digital ecosystem. To understand the new world of open platform banking, these days many banks are checking the waters by hosting hackathons on their platforms. Still barely scratching the surface of the opportunities for banking as a platform, banks like Capital One are already opening their APIs to third parties. For European banks PSD2 is approaching rapidly, creating the situation where banks may either stay ahead of the curve and open up to new business opportunities voluntary, or regulators will eventually drag them there kicking and screaming.
Regardless of type of collaboration there needs to be a common ground to make it mutually beneficial, clearly defined roles, and well-aligned end goals. No matter how you put it, there is still a clash of cultures when fintech entrepreneurs start working together with the pinstriped-suits wearing bankers to challenge the established truths. Needless to say these relationship are not going to be smooth, since fintechs are born with a mission to change and disrupt, and incumbents are inherently reluctant to change. After all, banks have built their business (and their name) on reducing risks and creating predictability for hundreds of years.