Christer Holloman, CEO and co-founder, Divido
Figures from Accenture estimate that the point-of-sale (POS) finance space represents a $1.8 trillion opportunity for banks, and that’s just in the U.S. There are no two ways about it, retail finance represents an enormous opportunity for banks. But are they missing a trick by not being nimble enough to dominate this landscape? Can they capitalise on this opportunity or will they lose out to the fintech pack who have come in and set the standard in the POS finance space?
When it comes to lending money to finance retail purchases specifically, most banks do this via credit cards. Whilst the card hasn’t evolved much in the last 50 years, consumer preferences certainly have, with fewer consumers choosing to have a credit card. This disconnect between consumer expectations and an ageing banking value proposition has paved the way for new lending providers such as Alipay, PayPal, Affirm, Klarna, etc. These firms combined are now valued higher than any one bank in all of Europe and North America.
The new digital ecosystem
Digital is the new global currency. Everybody wants to be part of the digital revolution that’s sweeping across the world. Fintech companies have disrupted the status quo and forever changed the way in which consumers manage their finances and view the lending landscape.
Banks have found themselves in a difficult place. They’re facing competition from multiple directions but can be held back by increasingly expensive legacy systems that limit product development in-house. Simply put, they aren’t innovating fast enough, and the level of consumer experience they need to be providing is nowhere near the level it needs to be in order to successfully compete in today’s increasingly competitive market.
A bank can easily spend millions of dollars, and take two or more years to build a system that can be offered by a fintech in a fraction of that time and, more often, at a fraction of the cost. In the time it can take for banks to develop a product in-house, potential customers are switching to digital-focused competitors who can already offer the service.
Legacy systems are only part of the network of barriers that can hold banks back from agile innovation. Product development processes within large banks are often very structured, require multiple sign-offs from stakeholders, and must adhere to investment and budget cycles set by the broader business. These processes can take months or even years to navigate and can have a detrimental impact on the bottom line in an increasingly competitive marketplace.
With fintechs continuing to grow, how can banks successfully navigate their way into the POS market efficiently and effectively?
Befriend the ‘competition’
As the old saying goes, keep your friends close and your competition even closer. All banks see fintechs as threats to their ecosystem, but not all fintechs perceive themselves to be threats. Instead, they can be the perfect partner and springboard for banks.
These are fintech companies that aren’t concerned with competing with banks and eating into market share but instead focused on partnership opportunities to innovate, attract talent and develop world-class solutions for consumers. The brand of a bank, combined with the agility of a fintech, can be the perfect recipe for success.
From Tandem Bank’s partnership with Stripe and Currencycloud’s work with Fidorbank to Divido’s partnership with Nordea Finance, we’re seeing an increasing number of collaboration agreements between banks and fintechs. This is a trend that will continue to grow and prosper as fintech continues to evolve. Why build the technology, when you can buy it?
Partnering with a fintech gives banks a direct and fast route to market and a chance to further grow and diversify their revenue channels. A flexible fintech partnership can offer banks the opportunity for growth and access to their technology without needing to spend vast amounts of time and money on their own research and development (R&D) in-house. The agility and innovative technology provided by a fintech is unparalleled, and one that banking legacy systems simply cannot compete with.
If they are to successfully remain relevant, banks need to recognise the importance of collaboration opportunities with younger fintech companies. The digital demands of the future are unlike anything banks have faced before. Banks that want to defend and grow their lending, and stay relevant for another 50 years, must act immediately to partner with fintechs and diversify their route to market, or they might quickly find out there is no longer a place for them. Banks and fintech don’t always have to compete, sometimes collaboration is key.