The battle between banking behemoths and new-age fintech firms may seem like the classic David versus Goliath. But dig a little deeper and there may not be much merit in pitting one against the other.
On the surface, one seems like an antiquated giant that’s hard to beat and the other is young, relevant and oh so agile. Fintech firms have the advantage of being able to launch with disruptive, new technologies in a relatively short time. Banks have established brand loyalty, decades of experience, and most importantly, financial muscle.
Fintech firms can also move faster as they are not bogged down by too much regulation or the challenges of having to establish a physical presence. On the other hand, banks have unmatched regulatory expertise, established infrastructure, and scale.
So, what then is the future for these financial services providers? To collaborate, of course! Keeping consumers’ needs in mind, fintech firms and banks will need to pool their resources to address whatever gaps there may be and ultimately offer services that are hard to beat.
Also, as customization of products become the norm, banks and fintech players will find themselves in a unique position. Both can combine their strengths to ensure consumers are showcased products that are aligned to their specific needs. Our marketplace BankBazaar, for instance, gives consumers access to products from banks, but only after first understanding their personal preferences, consumption patterns, credit history, and other factors.
While some collaborations are already underway, others are likely to take the following routes.
Banks can act as incubators or accelerators for fintech startups. Banks like Barclays, HSBC, and Royal Bank of Scotland are part of Innovate Finance that promotes global fintech firms in the UK. Back home, most banks are supporting fintech firms through various accelerators:
- The DBS accelerator program aims to play an active role in this ecosystem, supporting innovation and looking at players for collaboration
- Also going big this way is OCBC with its Open Vault program
- There is also FinLab, UOB’s 100-day accelerator program that has been set up with the Infocomm Investments (IIPL), Infocomm Development Authority of Singapore’s subsidiary. The bank is providing each financial technology startup with more than US$21,000 in seed money in return for a 6 percent equity stake.
Banks could acquire youngish fintech firms to plug their own gaps or provide a wider set of services to their customers.
This could be better compared to setting up units that require them to go through significant re-engineering. A new product, a more agile tech team, and customer integration—all of these could be tough to weave into a bank’s fabric. It is not surprising, therefore, that a recent study reported that 60 percent of banks worldwide would collaborate with a fintech firm, while 25 percent would consider acquiring one.
In 2016 alone, this trend played out among many leading players. BlackRock acquired online investment firm FutureAdvisor for a whopping US$150 million. Spanish bank BBVA bought over an online-only Finnish bank, Holvi, for entrepreneurs and SMBs.
In Asia, Standard Chartered PE and Goldman Sachs’ investment in Vietnam-based fintech startup Momo, an e-wallet and payment app, is an interesting development in the direction of fintech-bank collaboration.
Clearly, aside from expanding customer base, technology, and services, these buyouts or acquisitions also allow entry into new markets. Of course, in recent years, the biggest collaboration success story is arguably that of the Japanese app, Moneytree. The app, which helps people manage their spending, raised its Series A from Salesforce and three big banks: Mizuho Bank, Bank of Tokyo-Mitsubishi UFJ, and Sumitomo Mitsui Banking Corporation.
Areas of expertise
Lastly, fintech startups could take care of several non-core businesses or processes for banks, allowing them to remain focused on their areas of expertise even while unlocking new ways to add value to their offerings. A few fintech companies have ensured that they ace in areas like P2P lending, payments, financial marketplaces, online investment, and trading advice. By collaborating with fintech companies, banks could play a role in these areas without having to start from scratch.
A good example is JP Morgan Chase & Co. using On Deck Capital to develop a new online loan for small businesses. JP Morgan Chase spent a lot on technology in 2015, yet, when it came to reaching out to small businesses, it chose On Deck, an online small business lender.
Moving forward, it is most likely that both types of entities will work together seamlessly in a well-established ecosystem that will be focused on providing the end customer the ultimate convenience in doing any kind of business or transaction.
It’s also possible that when banks and fintech firms integrate, one would not be able to identify each entity based on traditional definitions—let alone debating whether one is better placed than the other.
Converted from Singaporean dollars. Rate: USD 1 = SGD 1.42.
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