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From distrust to love/hate – are fintechs and banks starting to get along?

From distrust to love/hate – are fintechs and banks starting to get along?

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.

Banking

It’s all relative: Older generations feel helping out the family financially is more important since the Covid-19 outbreak

It’s all relative: Older generations feel helping out the family financially is more important since the Covid-19 outbreak 1

Before Covid, 23% of people prioritised helping younger generations out financially, that increased to a third as a result of the pandemic

A recent survey* conducted by Hodge has revealed that the Covid pandemic has led to more people wanting to help younger family members financially.

A third (31%)** of those questioned said that since the Covid outbreak giving a financial gift to children or grandchildren is more important to them, compared to 23% who said it was a priority before the pandemic.

The traditional “Bank of Mum and Dad” is still very much open for financial help, with parents being responsible for 72% of the gifts, but the study also revealed that financial gifts can come from all corners of the family – including children (14%) and siblings (14%).

The survey also found that a third of people have received a financial gift from family, with those aged between 25-34 as the most likely to receive

The most popular reason for gifting money to family is for special occasions such as a quarter of gifts were given for weddings and birthdays but 11% of people have received money to help with big purchases such as cars and houses. In addition, 19% of people have received help with day to day finances, with around 14% of those receiving a gift have done so to pay off debt.

Emma Graham, Business Development Director at Hodge, said of the research: “Our study showed that, as a nation, we all want to help our family out when it comes to money. And whilst we all think of the Bank of Mum and Dad or Gran and Grandad as a traditional source, we were surprised to see that 14% of brothers and sisters are also helping out.”

The findings come from a recent intergenerational study conducted by Hodge, who interviewed over 3000 people about their attitudes towards finances and their aspirations for the future. The full research findings can be found at https://hodgebank.co.uk/2020/05/19/money-its-all-relative/.

As part of the study, people were also asked about paying back the gift, with 40% of beneficiaries expecting to pay their parents back, but this dropped to 28% if the gift came from grandparents.

From the gift donor’s perspective, 26% expect the gift to be paid back, however just 15% of grandparents expected the money back.

Hodge has produced a set of guides on how families can navigate the tricky subject of giving financial gifts within a family, as well as the considerations and steps that be families should think about taking before a gift is given, such as is it a loan or a gift and thinking about contingencies if the family member’s circumstances change. The guides can be found here: https://hodgebank.co.uk/news/

Emma continued: “It’s clear that families feel strongly about offering financial support to each other if they are able and this has increased since the Covid pandemic. Before Covid, 23% of people prioritised helping their families out financially in the next five years. Since the Covid-19 outbreak that has increased to a third of people saying helping a family member financially had become more important.

“So, it is clear that the Covid-19 lockdown and subsequent predicted economic downturn, has led to more families looking to share wealth to help younger children or grandchildren during this difficult time. Many people may look to Later Life mortgages, where many products have reduced their rates and have flexible lending criteria, to help out a loved during these difficult times.”

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Banking

New report identifies the factors which will determine SMEs’ chances of a successful COVID recovery

New report identifies the factors which will determine SMEs’ chances of a successful COVID recovery 2

·         Analysis of the performance of over 1,000 UK small and medium-sized businesses by Allica Bank provides roadmap for SMEs 

·         Regular training, an openness to innovation, and a clear vision all contribute heavily to an SMEs’ chances of success  

·         Allica Bank has launched a programme of free workshops to expand on the findings and support business owners 

Business bank, Allica Bank has combined data and insight from over 1,000 UK SMEs with a multiple regression analysis to determine what factors most closely aligned with an SMEs’ chances of success and separated the highest-performing businesses from their peers. These ‘rules for success’ have been compiled from the research data to support British businesses as they look to chart a course to post-Covid recovery.  

The full report identifies six behaviours for small and medium businesses to follow, to maximise their chances of a successful COVID recovery. The six top-line rules emphasised by the data were: 

Rule 1: SMEs should regularly train staff 

Of the top-performing businesses analysed, 47% provided training for employees at least on a quarterly basis, compared to just 32% of other businesses. Regular employee training was linked closely to success by the model.  

Despite this, many small businesses have neglected training and nearly half (46%) of the small businesses analysed only provide training for employees about once a year or less often. This included 15% that never provide employer-funded training. This discrepancy could represent a significant opportunity for small businesses to unlock the potential of their employees and thrive in the post-Covid economy. 

Rule 2: SMEs need to focus on innovation and technology 

Looking again to the best performing businesses, 76% were found to either continually (39%) or often (37%) be considering new opportunities for technology in their business. This is compared to only 51% for businesses considered to be outside of the top ranks, out of which only 27% admitted to continually looking for new technology opportunities. 

Rule 3: Small business must have a formal, long-term vision  

Nearly two thirds (66%) of the most successful businesses in the survey had a formal, long-term vision, compared to just 50% of businesses outside the top 100. Looking to the businesses that scored the lowest on the SME Performance index, only 37% claimed to have a formal, long-term vision. 

Rule 4: SMEs should broaden their customer reach and find new markets 

Of the top-performing businesses, 65% of these have overseas customers compared to just 40% of the worst performing businesses. Among the best performing SMEs, over a third (34%) identified international expansion as one of the top three drivers for their success. 

Rule 5: SMEs need to develop reinvestment plans 

22% of the best performing SMEs reinvested some of their profits into the business in the past three years with an average 9% of profits being redeployed. Tellingly, this is nearly double what other businesses admit to reinvesting in their business (5%). 

Rule 6: SMEs should engage with local business organisations and networks  

Of the top 100 SMEs, 30% had obtained external credit to expand over the past three years (compared to 24% of other businesses). Meanwhile, only 16% of all other SMEs had engaged with local enterprise partnerships or growth hubs in the past three years (compared to 23% of the top 100 SMEs). 

Chris Weller, Chief Commercial Officer, Allica Bank, said: 

“All small businesses are different, as are all small business owners, but one trait they share is an innovative resilience. Whilst the coming months and years will undoubtedly continue to present extreme challenges, there is no doubt that small and medium sized businesses across the UK will rise to meet them head on.  

“To give them the best chance to succeed, though, they need to be equipped with the right tools. There is certainly no silver bullet or panacea for every small business, but as this study has found, there are a number of common factors found in the most successful businesses that allow small enterprises to thrive and that they can consider individually for their business.  

“This research has identified common ‘rules for success’ that speak to every aspect of running a business, not just the financials. Once we saw these results, we wanted to use them to help small businesses begin to re-build and prosper, by outlining common factors and then examining how best they can be practically applied to businesses in all sectors of the economy.  

“Small business owners and their employees have been hit hard by the crisis, but they have the drive and resourcefulness to breathe new life into the economy and bring energy to post-Covid Britain. Our commitment at Allica Bank is to give them the support they need to do so, every step of the way.”

The full report contains a wealth of additional data and insight into each of these topics. As part of its mission to empower small businesses, Allica Bank is making the findings freely available and running a series of free online workshops with relevant partner organisations for businesses to attend.

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Banking

New research finds that financial wellbeing should be at the heart of banks digital experiences as the UK enters recession

New research finds that financial wellbeing should be at the heart of banks digital experiences as the UK enters recession 3

MullenLowe Profero have today launched a new report focusing on two communities who will be hardest hit by the recession: 18-25 year olds and small businesses. These communities need financial wellbeing support at the core of an increasingly digital relationship. MullenLowe Profero partnered with Censuswide to survey 1,004 18-25-year-olds and 504 small businesses.

Concern around financial shocks is harming individual’s wellbeing

The survey finds the ability to absorb financial shocks being the critical worry affecting wellbeing and 40% of 18-25-year-olds are sometimes afraid to look at their bank account.

They are seeking financial education to relieve worries

With over two-thirds of respondents demanding financial education in order to find peace of mind and 40% of 18-25-year-olds state that thinking about their money has a negative impact on their wellbeing the report highlights the audience are open to more active support from banks. 60% of the audience feel banks should help them have the capacity to absorb a financial shock.

When our bank is in our pocket reminding us of our anxieties, is there now a duty of care to support our wellbeing?

The survey finds that the digital experience is now the number one reason for choosing a bank for 18-25 year olds.

With this shift in digital preference, people are expecting banks to play a bigger role in wellbeing. 58% of those worried about their money want banks to help them take control.

More than half of 18-25 year olds agree that a bank’s role is now to:

  • provide education on money management
  • help them keep on top of financial goals
  • help them save enough money to cope with the ups and downs of life

People are feeling closer to local communities, but there is a gap in how brands should engage communities in a digital world

Half of 18-25 year olds agree that in the last few months the importance of their local community to them has increased. 40% agree they’ve engaged more with their local community in recent months. There’s a tension between how to engage a community as 60% agree they prefer a bank with better digital tools over a bank that offers more local branches. However, 60% feel banks need a branch presence to support local communities.

The importance of Global Wellbeing rises

Over half of 18-25 year olds agree that the events of the last few months have made them seek out brands that do better for the world. The research findings show that what they want most is to be recognised for their positive behaviours. 56% of the audience highlighted that they would find rewards and benefits for purchasing ethically and sustainably most useful.

Banks digital experience today lack empathy

In this time of reset, the survey found a third of customers and small businesses are considering changing banks in the next year as a result of the impact of the pandemic. The report concludes that brands that will win will champion financial wellbeing in the digital experience through empathy and emotional intelligence.

For the full report, get in touch with MullenLowe Profero at [email protected]

Howard Pull, Head of Digital Transformation Strategy at MullenLowe Profero, said: “Our findings are a wake up call for digital innovation in banking relationships.  With digital experience being the number one choice for selecting a bank, there’s a huge opportunity for banks to support individual wellbeing at scale by understanding and responding to our goals and anxieties to build better money habits.”

Methodology

The research was conducted by Censuswide, with 1,004 18-25-year-old current account holders and 504 small businesses with business bank accounts and annual revenues up to £2m between 23.06.2020 and 29.06.2020. Censuswide abides by and employs members of the Market Research Society which is based on the ESOMAR principles.

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