Challenging disruption: why collaboration with ‘regulated fintechs’ is what the finance industry really needs
By Ivo Gueorguiev, Co-founder and Executive Chairman, Paynetics
It’s not hard to come up with a long list of companies who have disrupted the financial services industry over the last few decades. Mastercard and Visa changed how we interacted with physical cash. Monzo and Starling have changed how we view bank accounts. Klarna, now Europe’s largest fintech, has changed how we pay for our online shopping.
Whilst it’s true that this disruption has brought us new products and services that we never could have previously imagined, it’s also true that disruption is a painful process. Countering the status quo doesn’t come without its own stresses for both the challenger and the challenged. And after all, in many ways we are living through the greatest disruption to our lives that most of us have ever experienced. Perhaps the impact of COVID-19 has borne an environment that is less welcoming of the idea of disruption at all.
To take this further, I’m questioning whether the language of disruption is really how we want to frame how all fintech companies move into the financial services market. Many fintechs are actually able to collaborate with those organisations that have an established presence in the market, to drive even more innovation and development and therefore benefit both industry and end-user.
In collaborating, there’s still room for change
I’m definitely not implying that we rest on our laurels and allow the industry to fall into stasis. We must acknowledge that many established players in the financial services sector have issues within their businesses which should be looked at, interrogated and improved. Technical debt, legacy technology, outdated compliance systems, infrastructures that are vulnerable to a cyberattack; all of these are examples of things that should be optimised and changed in order to progress.
But these older, more traditional organisations also have a host of strengths that should not be overlooked. Years of investment have created established brands, they have vast pools of resources that can be used to solve problems and, as a result of both of these things, they have trust.
At the other end of the scale, challengers have played a significant role in elevating the need for change, and have taken different paths to attack and disrupt the incumbents and underline this point. In my view, it seems that this is coming to an end and that the most successful approach for driving true change across the sector is not one of challenging, but of collaborating.
And whilst there are pain points to address – a recent study from CapGemini and Efma revealed that only 21% of banks say their systems are agile enough for collaboration and over 70% of fintechs say they are frustrated with the incumbent’s process barriers – the potential benefits are huge. Fintechs can match the experience, authority and gravitas that existing players have with their energy, agility and innovation in order to drive the industry forward.
Advances in both technology and regulation can definitely help to support this evolution, and remove the common barriers. The increasing use of APIs and developments in Open Banking and Open Finance will help create a shared set of protocols and processes to aid collaboration, and from this will come innovative new products and services. The global partnership between HSBC and Bud is a great example of how a bank and fintech startup are working closely together to the benefit of their customers, as is Lloyds Bank’s collaboration with fintech Xelix.
Regulation, regulation, regulation
To avoid regulation and compliance becoming stumbling blocks for successful collaboration between fintechs and larger corporates, I know from my own experience that fintechs need to actively seek to comply so that what is offered is “institution-class”. By definition, fintechs are often unregulated and so when it comes to cooperating with financial institutions there can be a lack of understanding of what is a very complicated regulatory framework.
But a new breed of “regulated fintechs” can remove this headache for corporates that want to build out their partnership network. These companies can bridge the gap between innovation and regulation, and as they can offer the best of both worlds, they can significantly shorten the time to market.
I’ve also been watching how the entrance of BigTech into the financial services market has proven to be a catalyst for closer collaboration between regulated fintechs and established players. Google will launch its digital banking solution next year, WhatsApp has moved (although somewhat unsuccessfully) into the payments industry, and with the millions of users and gargantuan budgets companies like this have at their fingertips, no one can compete against their offerings alone.
I have no doubt that BigTech will either dominate or be important players in the ‘bread and butter’ financial services space, if allowed by the regulators of course. But I do not believe that they can be competitive in the more sophisticated and intricate products, which is where the finance industry can lean on the specialisms of fintechs who have that deep domain knowledge. In the same vein, BigTech companies have become very large ships that are difficult to manoeuvre, and for which payments will only ever be a side business. Again, fintechs can offer that agility and complete focus on bringing cutting-edge solutions to market in a much more efficient manner, and in line with rapidly changing customers behaviour and demands.
I’m hopeful that there will be an adequate regulatory and supervisory reaction to their ambitions, and in the meantime any successful competitive responses will require collaboration from all areas of the financial services industry.
If fintechs recognise that the true value that they can bring to the table in their partnerships is both their agility but also a deep understanding of the regulatory landscape that they are bound to, we’ll continue to drive meaningful change as an industry. In our uncertain times, we shouldn’t look to needlessly reinvent the wheel and disrupt everything we know to be true. Instead, real change will come from considered collaboration.
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