Why banks have nothing to fear but fear itself.
By now you have probably heard the buzzword “FinTech”, and these days when many think of the banking sector, thoughts of FinTech and digital innovation are probably not too far behind. FinTech stands for Financial Technology, meaning: the use of technology in the financial sector. FinTechs have increasingly become synonymous with technological disruption in the financial and banking sectors.
Disruption always brings along a certain degree of skepticism and fear. The banking sector is no exception. The sudden disruption and explosion of FinTech startups has resulted in quite a bit of panic in the traditional banking sector. Since their arrival on the scene, banks have long been fearful of the future impact of FinTech startups on their bottom lines. However, the reality is that this fear is quite unfounded, and believe it or not, most banks are actually their own worst enemy. Banks that are too stubborn to change and adapt to the new digital world we inhabit today are the ones putting themselves in danger. Traditional banks have no reason to fear the impact of FinTechs on their bottom line, they need only to fear themselves if they do adapt to the evolving needs of their customers.
The FinTech market is flourishing, and shows no signs of slowing down. According to a recent report published by KPMG on the global state of FinTechs, investment in European FinTech companies hit $26 billion over 198 deals in the first half of 2018. It is clear that FinTechs are not a passing fad. Thus, the question on everyone’s mind has been: could banks be in danger of extinction by FinTechs?
FinTechs are facing their own challenges. These companies are up against strong regulatory barriers to entry, distrust from many customers, and many are also dealing with a lack of capital (especially when compared to the massive amounts of capital that big name banks have). Bringing down the decades of trust and reputation that banks have built is not an easy feat. One thing is for certain, the landscape certainly is changing as FinTechs continue to set higher bars when it comes to the customer experience.
This changing landscape, is consequentially creating new challenges and opportunities for traditional banking institutions. Traditional banks have three choices when it comes to facing FinTechs. One option is to replicate what FinTechs are doing by actually trying to copy their technological innovation. A second option for banks is to fight back with their own comparably innovative solutions. Third, they can finally let go of their skepticism and fears and form harmonious relationships with FinTechs.Yes, you heard right, banks and FinTechs can co-exist in this new landscape. Moreover, not only can they co-exist, they can flourish. Alone we are strong, together we are stronger. The chance to join forces brings enormous opportunities for both FinTechs and banks.
Reliability meets innovation
Many banks have finally realized that FinTechs do not have to be a threat. The mistrust that existed in the beginning is finally starting to melt away. FinTechs have redefined customer experience expectations, and banks are seeing the true value that they are bringing to the industry as a whole. The future of both FinTechs and banks lie in their ability to collaborate with one another, as only then can the full benefits of innovation be achieved for both.
FinTechs provide innovative solutions to complex problems but need the help of banks when it comes to regulatory compliance, licensed financial products and services, technology infrastructure, customer base, and complementary services (complementing offerings with bank services). Again, the threat against banks does not come from FinTechs, but from the other banks that better leverage those very same FinTechs. FinTech startups can benefit from many capabilities of banks, while banks can also generate new revenue streams and improve their customer experience with the help of FinTechs. In the end, it is a win-win situation for all.
The banks that will succeed in delivering value and improving the customer experience, will be the ones that work with and not against FinTechs. When it comes to collaboration, there are various routes companies can take. We can break this down into four collaboration models: the channel, the supplier, the satellite, and the merger.
The channel occurs when a traditional bank channel contains FinTech offerings. The supplier channel is when a bank actually engages with a FinTech firm as if it were its supplier. When this happens, the traditional bank is actually integrating the capabilities of the FinTech firm into its own offerings. The satellite model is a progression of the supplier model and occurs when the bank acquires a FinTech firm, but then leaves the firm to manage itself. Finally, the merger is more of a traditional acquisition model, and occurs when the FinTech firm is purchased and then fully integrated and re-branded into the traditional bank. There is no one-size-fits-all approach, and sometimes a combination of these different models is the best way to go, depending on the needs of both the bank and the FinTech in question.
Banks have the access large pools of customers and capital, which FinTech companies do not, while FinTech companies have the technology that banks need. Through collaboration each party can benefit from the others skills. There is more value to be added through collaboration over rivalry.
United we stand
At Housers, we believe in this great value that can be created by forming alliances with traditional banks. One example? The European FinTech company, Oval Money, has also chosen the route of collaboration over rivalry. Oval Money is an Italian FinTech that allows millennials to track their spending, saving and investing in a single app. The app launched just last April, but by partnering with Intesa Sanpaolo, an Italian banking group, the FinTech was able to launch its product leveraging the bank’s massive customer base, while also giving the bank access to a new base of young customers.
When it comes to a business partnership, by definition such a union should bring mutual benefits to both parties involved. If the partnership isn’t benefiting both parties, then there is no reason to be in the partnership. It should always be a win-win situation. The Oval Money alliance with Intesa is just that, a win-win situation. Alliances like these allow both FinTech companies and traditional banks to work more efficiently and provide even greater value to customers.
At Housers we firmly believe that we are always stronger together, and the successful future of both FinTechs and traditional banks is contingent on unity.