In Accenture’s recent report ‘The future of fintech and banking’, collaboration between tech startups and financial incumbents is described as ‘particularly popular’ - the scenario of a battle between fintechs and incumbents, like most boxing matches, might just be overhyped, it seems.
But collaboration will not be a walk in the park. Both fintechs and banks will push every advantage they have to reshape the industry around them. Five key areas of competition and my prognosis who will ultimately have the upper hand in each.
Creativity and innovation
Released this week, Thomson Reuters’ list of Global Innovators puts the US only second behind Japan, with its real muscle coming from Silicon Valley. Fintechs are equally innovative, combining slick startup skills with real financial intelligence.
They naturally work in the niches created by bank inefficiencies, complying to regulatory constraints. These limitations actually benefit fintechs since they provide the structures that regular startups lack.
Banks, contrary to popular opinion, do innovate. Part of the 2008 recession was due to over-innovating, bundling sub-prime mortgages into collateral debt organisations creating heavily inflated credit projections. What banks lack is the flexibility to challenge such innovation – they are overly-structured, and as a result, they stagnate. Bank of America has been leveraging fintechs to drive innovation, organising summits for fintech startups, and giving the best ones the opportunity to become tech vendors for the Bank. This way, the bank can trial risk-free innovation before implementing it in their processes.
When we speak about money, we’re not just speaking about ones and zeroes. We are dealing with more than money: We’re dealing with livelihoods, values and people’s hopes for the future. Money is emotional – and this is a fact which is not to a newcomer’s advantage.
American Banks have been pumping money into marketing, increasing expenditure year-on-year by 4 per cent. U.S. Bank was the best for the year 2014-15 in creating brand awareness and converting it into customer usership. By building larger and larger inroads into consumers’ lives, particularly in the digital space, banks are using marketing as powerful weapon to deter consumers switching to fintechs. To prise customers away from banks, fintechs need to build more convincing campaigns showing how they can be trusted with customers’ money, security and values.
Chris Larsson, founder of Ripple says: “To be successful [in financial services], you need to reconcile three key domains: tech, capital markets/risk mitigation, and compliance.” Silicon Valley might do tech incredibly well, but its expertise in risk and capital markets is far from advanced. Banks can reconcile regulation with their technologies in a much more holistic way at the moment.
While regulation benefits fintech in deterring feckless businesses from entering the domain – and a more regulated fintech sector would help create that aforementioned consumer trust – the truth is that banks benefit overwhelmingly from regulation in a way fintech does not. Not only are banking lobbies stronger, larger and better connected than fintech ones, regulation may actually prevent the industry from being disrupted too much.
There is an exodus of banking staff to fintechs. The Economist agreed that while the cultures of banks and fintechs are different (banks stifling, and fintechs optimistic), they rely on the same people to make their industries successful. It requires no stretch of imagination to see why a fintech should want to usher in this talent coming through their doors.
That being said, the crisis in 2008 also played its part. Since then, US banks alone have cut 500,000+ jobs, and the White House has estimated that more that 500,000 jobs have been created in cyber security and software development. Fintech is an industry driven by data – the need for humans staff is therefore skewed towards developers, analysts, legal professionals, and not traders.
Please wait in line. This is not what people want to hear, especially when trying to access basic banking services. People want to be able to manage their finances seamlessly, and fintech’s greatest strength over its competitors is its ability to fit into the life of the consumer. Banks are building incubators all over the world to modernise and streamline their services, but they cannot keep up with the delivery capabilities of fintechs. U.S. Bank’s valiant efforts in offline marketing, going ‘out into the community’ rather than waiting for customers to come to them is commendable, but simply a step behind fintechs.
Lending services, international and domestic payments, commercial banking, investment advice – banks are fully aware that their retail services woefully under-perform in comparison to fintechs. This is because UX is another of fintech’s great strengths over large incumbents: Fintechs can react quickly and produce better outcomes efficiently.
While it could go either way with the future of collaboration, I see fintech taking a leading role in the evolution of the finance industry. The best fintechs will take control of the markets where institutional inefficiency is still rife – with the official support and endorsement of banks.
Toby Triebel, CEO and Co-Founder of Spotcap
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