It’s been a tough 10 years for bankers. After a string of bailouts due to the 2007 financial crash, it seems the banking Goliaths of the world can do little to appease the public.
The consequences of the crisis are still being felt today.
Long product development cycles and endless obstacles have left traditional banking customers with a poor user experience as banks fail to embrace technology.
A slew of startups working in the financial technology sector started to pop up.
These plucky young Davids offer customers a new way to bank. With the swipe of a smartphone screen customers get access to peer-to-peer lending platforms like Lendy where you can earn up to 12% pa by investing in UK property, and payment processing channels like Apple Pay, Braintree or Square where your bank account is automatically debited when you finish an Uber journey.
Fintechs raised $13.6 billion in global venture capital investment in 2016, a 7% increase compared to 2015. And, in the first half of 2017, worldwide VC investment attracted $6.5 billion – with UK investment up 37%.
But the potential of the world’s Fintechs goes beyond a better user experience and robust funding opportunities. In some corners of the market, there is a belief that the rise of the Fintech could also sound the death knell for traditional banks.
How Fintechs could beat the banks
The major advantage Fintechs hold over banking incumbents is the ability to adapt to the changing demands of the customer.
Fintech-friendly regulations are accelerating this agility. Fintechs can develop new and fast systems in a matter of months, whereas traditional banks can struggle to cut the red tape and update cumbersome and outdated legacy systems.
For example, Fintech unicorn Stripe allows websites and apps to incorporate payment services using an API and a few lines of code. It’s an incredibly simple solution to the previously painful procedure of processing payments.
“Our initial idea with Stripe was that for people like us – those building apps and websites – it was incredibly difficult to take payments. So with an open mind, and maybe a useful lack of knowledge about the industry, we started building a payment product,”
Stripe’s founder John Collison said in a recent interview.
“What we didn’t realise was that the problem was actually much broader. One, the problem was applicable all around the world. Two, it was relevant not just to new companies starting out, but also to the Salesforces, the Walmarts and the Twitters,” he added.
The company was recently valued at $9bn.
Digital distribution also negates physical distribution costs, providing Fintechs with a further economic advantage. Fintech lenders, therefore, have up to a 400-basis-point cost advantage over traditional banks.
Fintechs are also more adept at working with Big Data and, while many banks may collect vast amounts of data, few have the advanced analytics tools to deal with them. According to the McKinsey report, Cutting Through the Noise Around Financial Technology: “In a world where more than 90% of data has been created in the last two years, Fintech data experiments hold promise for new products and services, delivered in new ways.”
So, with more cost-effective business models, effective Big Data analysis and the agility to match market demands, are Fintechs the secret assassins of the world’s incumbent banks?
When we look at the most successful Fintechs, they are not replacing banks but serving underserved markets. No one Fintech looks poised to replace a traditional bank. They are addressing areas where banks struggle to meet specific customer needs due to cost or risk.
This fact alone could save the world’s traditional banks.
A future world of financial cooperation
In reality, the world’s Fintechs and incumbent banks are competing less and collaborating more, according to the PwC Global FinTech Report 2017. A new era of financial cooperation between the two groups is upon us with some 82% of traditional banks expecting to increase Fintech partnerships in the next three to five years.
Yet, only 20% of banks expect an annual ROI on Fintech related projects. While banks might not benefit from such partnerships in tangible financial terms, Fintech partnerships offer a fast and iterative approach to innovation and this will also help banks to reduce costs and create new market opportunities.
Such strategic collaborations also bring benefits to Fintechs. These banks don’t just have deep pockets, they can also give Fintechs access to their massive customer bases and the Big Data these startups need to test and optimise their products and services.
The banking sector is clearly keen to pull Fintechs under their wing. The industry has already created 16 bank-funded corporate accelerators investing in Fintech.
The Fintech Innovation Lab, in particular, provides a mentorship programme and builds relationships between banks and Fintechs in New York, Asia Pacific, Dublin and London, for example.
Open innovation is another key component for such partnerships to thrive. Banks must fully engage with Fintechs and share their own intellectual property, assets and expertise to help generate new ideas, change organisational culture, identify and attract new skills, and discover new areas for growth.
The Accenture The Future of Fintech and Banking report identifies the three common themes for banking executives ready to dip their toes into the waters of Fintech collaboration as: openness, collaboration and investment.
“Embracing these themes and creating the right foundations will allow banks to disrupt their own business model rather than sit on the sidelines watching challenger models disintermediate them,” the Accenture report states.
The convergence between Fintechs and traditional banks is a huge step forward for the financial industry. Such partnerships will allow both to realise accelerated growth but, ultimately, the customer will benefit from better financial services and products.
Such collaborations may not always be straightforward from either a cultural or technical standpoint. But they are an absolute necessity for bankers to survive, and the financial services sector to thrive. The Deloitte report Banking on the Future: Vision 2020, states: “Banking in the future will be collaborative, exciting and will raise the bar in setting new standards.”
So, it’s not a case of “bye bye bankers” but more “hello innovation” in the years ahead.