By Ivo Gueorguiev, co-founder at phos, looks at the evolving relationship between banks and fintechs.
Until recently, banks and fintechs were very much at odds. The latter were boasting of their ability to put banks out of business, while the former viewed these digital natives as dangerous disruptors.
Now, however, we are experiencing a paradigm shift in the relationship. Both sides are starting to realise the benefits of working together –Lloyds Banking Group's investment in Thought Machine and the global partnership between HSBC and Bud are just two examples of where legacy banks and fintech start-ups are working closely together to the benefit of their customers.
From industry disruption to financial partnerships
So, what is driving this change? Fintechs have started to appreciate the importance of being in the market for tens and hundreds of years and have realised that displacing a well-established bank is not easy. If you can't beat them, join them – many fintechs are now taking the view that actually working with, rather than against, their legacy competitors could be a faster route to mass market awareness. A survey by Capgemini survey found that 66% of fintechs partnered with an established financial services provider for enhanced visibility. Plus, having a major bank alongside helps with funding, whether it is from the bank itself or from investors who might otherwise be hesitant to support a start-up.
For banks, it is a fast track to injecting the agility and creativity their own operations often lack, and being able to get new offerings to market quickly. They are aware that their size and legacy infrastructure makes them slow to implement change or to think laterally – core strengths for fintechs.
However, this new era of partnership is not without tension.
Less hate, more love/hate?
Despite both sides willingness to work together more collaboratively, issues still remain. It's perhaps ironic that some of the reasons that brought them together – the size and scale of the bank, the agility and dynamism of the start-up – are also sources of friction.
In many cases, it comes down to the clash between two different ideologies. While it can be encouraging to see commitment to financial innovation from senior management, the board and even shareholders at banks, that promise can become diluted as ideas move down towards execution. This requires buy-in with key people throughout the whole bank and is an issue of big vision versus cold reality. They have to understand the need for change and have it as a tangible, accountable objective. Why? Because there remains a need to deliver profitability. If a team has been given a nebulous goal of being more innovative, and that clashes with a commission or revenue objective, then it is not hard to see which is going to be given priority.
Fintech may be seen as cool, but if a startup collaboration doesn't obviously and clearly enhance a bank's profitability, and fast, then it will slip down the priority list. A CEO may trumpet a daring new partnership, but if that fails to translate into returns to talk about on earnings calls, then it is unlikely to remain a focus.
This in turn can make it harder for banks to justify putting significant money towards innovation if there is not a clear return, no matter how pro-fintech they present themselves. A fear of risk, where mistakes are punished, also means that working with smaller, independent companies can be more challenging. To paraphrase and old saying, 'no one was ever fired for choosing Oracle.
There can also be a sense that, rather than offering better experiences and new services to customers, banks are fearful that it would impact customer loyalty. As such, they choose to not offer the sort of digital-led, open-banking solutions that are perceived to hold that risk.
From a fintech perspective, suspicion still remains that increased interest in partnerships may be a pretence to corralling the impact of start-ups, either by locking them into relationships or simply appropriating ideas. Established banks' troubled history with innovation supports this – the shuttering of RBS' digital bank Bo is one example where a major institution has struggled to create its own disruptive brand.
Fintechs need to play their part too. Working with bigger companies requires adaptation and a realisation that, while what the fintech does is important to them, to the bank it is just one piece of a much bigger jigsaw. Yes, banks want to absorb ideas and learn from startups, but they will have established processes in which to do so.
Another challenge is the gap between idea and execution. Fintechs have been responsible for some fantastic innovations yet struggle to monetise and ensure profitability. This is a major barrier to success, either as a standalone company or in partnership with others. The entire sector is riddled with propositions lacking economic sense. In many ways, it is reminiscent of the dot.com boom – for every great business that took off, there were tens and hundreds that were just riding the hype, with no real plan to turn ideas into something that will have a tangible impact on people's lives.
How change will accelerate
Despite the tension, most players, both established and new, realise that change is both inevitable and accelerating. The impact of recent months is testament to this, as changing behaviours and rules have led to a drop in cash and a rise in digital and mobile payment solutions.
For banks, this means needing to embrace innovation, whether that's build it themselves, partner or buy it in. It's true there have been missteps and mistakes, but as more success stories emerge, more best practices are identified, and forms of cooperation that support both bank and fintech start to crystalise. For smaller banks, with more limited resources, embracing fintechs will increasingly become a source of competitive advantage.
As for fintechs, the increasing maturity and size of those that have been able to execute their ideas properly and profitably, or have sufficient and patient financial backing, will enable them to enter new markets alone. This in turn will help establish their capabilities and credentials in the eyes on banks, leading to these more mutually beneficial partnerships. More importantly, it could help fintechs' reach new audiences, taking them beyond digital natives to older demographics. But even in this case, banks will remain the most likely exit for fintechs. Banks who were too shy to partner at an earlier stage may end up buying the same fintechs, at much higher price probably.
Profiting from the inevitable
Both fintechs and banks stand to profit from the disruption of financial services – banks can offer new services and products, while fintechs can achieve mass market impact. However, this will only be possible if they can find a common ground and work together. There needs to be compromise and increased awareness of how their partnerships and collaborations will work.
Do that, and fintechs will achieve the scale and impact they want, while banks will secure future growth and remain relevant in a dynamic, evolving marketplace.