Banks and Fintechs: Rivals or best friends?
Fintechs, these finance sector startups, appeared barely two decades ago, in the face of a banking sector that was already centuries old.
Relations between banks, insurance and asset management groups and finance startups have, to a certain extent, followed the cycles of human passions. Initially indifferent to these “pipsqueaks”, traditional financial institutions soon began to show a certain irritation at their audacity, followed by a genuine interest in their technological and usage innovations. In some respects, the current situation is sometimes like a loving feeling, given the fintech theme’s apparent potential, notably amongst younger generations.
The first fintech wave actually concerned innovative uses (new means of payment, crowdfunding for example) and user experience more than technology. Banks showed real interest in these innovations, particularly as this first wave in large part concerned B2B2C offers. This led to a substantial number of diverse types of partnerships: Distribution agreements (white label or own brand), process delegation, etc. We also saw a high number of stakes acquired in fintechs, as well as some acquisitions that, it should be emphasised, generally went well.
However, one shouldn’t paint too idyllic a picture of all this cooperation, which also sometimes led to misunderstanding and frustration. In summary, let’s say that fintechs occasionally underestimated large organisations’ complexity and, it has to be said, their slowness of response that is in stark contrast with startups’ extreme responsiveness. Bankers, meanwhile, were often surprised by their new partners’ low level of formality. A sort of culture shock.
Today, a kind of maturity in the relationship has been achieved. This manifests itself in various ways.
Firstly, in the many modes of interaction: Development of shared pilot schemes, tripartite partnerships, acceleration programmes, incubation, etc.
Secondly, in the expansion of the fields of cooperation: RegTech, KYC, risk management, productivity, as well as the new professions and client segments concerned: CIB, Wealth Management, SMEs, etc.
It should be noted that Asset Management was not particularly concerned by the first wave, which was primarily devoted to Retail Banking. This is no longer the case, with the development of various services: Fund manager universe, regulatory and risk management tools, investment advice, etc.
Lastly, traditional financial establishments have learnt to accept that fintechs can be both their partners and their competitors.
Indeed, the first fintech wave primarily related to specific ‘vertical’ services (payment, financing, investment advice, etc.) exclusively devoted to individual customers, often in B2B mode. Models are now increasingly moving towards B2C, platforms offering more services, or even neobanks, tackling new segments such as wealth management clients, SMEs, etc.
From this perspective, fintechs are irritants once more whose clout is increasing: The valuation of the world’s largest fintech (ANT Financial) is two and a half times that of Europe’s largest bank(1)…
We are entering a new phase characterised by:
An in-depth change in demand, notably from younger clients. In simple terms, millennials consume financial services the way they consume other services (culture, transport, social media, etc.),
The massive and growing contribution of technology, particularly Artificial Intelligence and Blockchain. Data technology will notably revolutionise consulting, risk management and operational efficiency, issues at the very heart of banking,
New entrants coming onboard: Telecom operators, the mass retail sector and especially Big Tech companies (America’s GAFAM and China’s BATX).
This situation has two immediate consequences:
Fintech entrepreneurs are no longer one-on-one with traditional institutions and are developing exchanges and cooperation with new entrants,
Pressure on incumbent players is rapidly growing and requires a swift response.
Fintechs still only represent relatively little market share on most segments, but they are growing rapidly.
Within this context, relations between traditional financial establishments and fintechs are showing their value.
Indeed, fintechs make it possible to adapt the offer to new requirements in terms of practices and technology. They represent a kind of R&D outsourcing and a valuable testing option.
Ultimately, they allow two major advantages within the current context: Save time in the story’s acceleration phase and alter what is by far – much more than technology – the most difficult thing to change: The culture, and notably the culture of innovation.
Regarding this point, the two models are very different:
A bank can rely on its solidity, extensive expertise and trusted third party status. There is constant and substantial innovation in the bank, but sometimes at a rate that is much too slow and with insufficient amplitude. Limited risks are taken, and mistakes are forbidden or even punished,
A fintech is often young and fragile, but it is extremely reactive and has close technological ties. It develops a less proprietary approach and doesn’t hesitate to incorporate external bricks. It experiments, feels its way, learns from its mistakes, adapts. It often better meets millennials’ expectations and history’s acceleration.
Both therefore have a lot to learn from each other.
This means exploring new areas of cooperation (risk, operational efficiency, interstitial business line areas, etc.), the development of new common models, and first and foremost good mutual understanding and appropriate management of their relationship. A single-entry point, familiarity with these innovation topics and good relations with startups are a guarantee of success. It is an immense field and the joint development potential is limitless.
It is essential to fully grasp how urgent it is to adapt to changing demands and Big Tech’s massive arrival in the financial services sector. For incumbent players, banks, insurers and asset managers, fintechs are not a problem but rather the solution – or at least a major part of the solution.
So we need to talk to each other!
(1) Les Echos (February 2018).
Alain Clot has over 30 years of experience in the international financial sector, mainly at Societe Generale Group, where he notably held functions of Head of Treasury & Capital Markets in London, Head of Group Strategy, CEO of Societe Generale Asset Management and Managing Director of Credit du Nord. He has been involved in digital finance for over 15 years, first as a Bank Strategist, as a Business Angel and, since June 2015, as the founding Chairman of France FinTech (association federating the French Fintech ecosystem). He is also a Senior Advisor at EY.