The financial services industry is a sector which has been dominated by competition in recent years. The rise of fintechs was previously seen by banks as agile disrupters of their profitable businesses, moving into territories which have never before been challenged. But as the realisation grows from both parties that collaboration is better than confrontation, some key challenges for the industry still remain – can they ever be solved?
Competition between banks and fintechs was rife two to three years ago. The argument was that banks, hindered by legacy technology and rigid hierarchies, would ‘have their lunch stolen’ by more agile fintechs. Proponents of this notion argued that fintechs offer more opportunities for modernisation, and have the ability to offer their customers far more innovative products and services as a result.
Traditional banks face two key problems; increasing regulations, and having to manage rigid and highly-ordered structural hierarchies. These are concerns which aren’t faced as much by fintechs, who are far less constrained and constantly innovating – simply because they can.
“Fintechs have the ability to bring innovative solutions to market quickly to satisfy customer demand, with an improved customer experience that can be utilised cross border,” says Nick Armstrong, Co-Founder and CEO of Identitii. “Unlike banks, fintechs provide solutions that have a lower cost base and a more flexible technology infrastructure, for example cloud-based solutions and clear project timelines.”
However, Armstrong admits that banks, with their large balance sheets and years of experience of local markets, have an extremely secure business model. “Some fintechs are simply not as secure in their business model as banks,” he says. “Most fintechs face a problem in scaling up their businesses. They often suffer a lack of trust by not being an established brand name, have a lack of capital and the expertise of handling regulations.”
Julia Fordham, Group Head of Treasury at Small World Financial Services agrees. “I think the relationship between banks and fintechs will undoubtedly be one of cooperation rather than competition. To me, the ideal marriage is where you have an application that’s backed by a big bank, because ultimately every business has got to have liquidity – after all, the payment will only get there as fast as the value transfer can happen between those two partners.”
Extending the hand of friendship
As such, fintechs have been increasingly eager to extend the hand of friendship to their banking counterparts.
One such example is Dublin-based digital trading platform we.trade. “We.trade addresses the challenges of open account and documentary trading for trade partners,” says Ciaran McGowan, General Manager at we.trade. “We are a digital platform delivering certainty, simplicity, security, for multiple parties on the value chain.”
By using a blockchain smart contract, we.trade’s platform creates a trade between both buyer and seller, coupled with the buyer’s bank and the seller’s bank – so when all conditions of the contract are met, a payment is then triggered.
“We currently have 17 European banks signed up – nine of which are currently using the platform, in a live production environment, and at least four more will be joining shortly,” notes McGowan. In answering the question of who to choose, a bank or a fintech, McGowan believes the answer for treasurers is clear. “By choosing the right fintech, treasurers can indirectly choose a bank. It’s all about how we can all work together.”
The road ahead
According to last year’s World Fintech Report, published by Capgemini, more than 55% of fintech firm executives polled said that gaining visibility, achieving economies of scale, earning customer trust and establishing a better distribution infrastructure, were crucial reasons for partnering with traditional financial services firms. In addition to this, for 76% of fintechs, their primary business objective was to collaborate with a traditional financial firm, whilst only 18% wanted to go it alone.
But the main problem for fintechs, believes McGowan, is that many banks either can’t team up, or simply impose more stringent checks and balances before committing.
The evidence comes from the same report, which found that the main problems in effective collaboration with banks are the general lack of agility (70%), and an overall unwillingness to partner (59%). The major concern for banks, fintechs claim, is that there is a perception that partnering with a somewhat unknown fintech will damage both its brand and consumer trust in its organisation, not to mention the financial fallout and reputational damage should its operations ever be compromised.
In order to overcome these hurdles, traditional banks want fintechs to prove themselves. For a fintech with a good business model, the following four pertinent questions should be asked:
Finance – Does the fintech in question have the right business model to generate enough revenue to ensure it is still in operation in 12 months? It should also always have access to capital, whilst having limited liabilities.
People – For the perfect fit, the right fintech will have to have the right people in the right places. It needs to have enough people with the relevant experience across the board; high levels of business acumen, strict management and governance, relevant industry knowledge and the right cultural make-up, to name but a few.
Business needs – What are the specific problems that need to be addressed? Can the fintech solve problems which are unable to be addressed due to legacy systems or processes? Does it have a proven track record in effectively providing solutions which rectify limitations in current offerings?
Technological solutions – Finally, can the solution scale up to address the needs of hundreds of thousands of customers? Is it able to integrate seamlessly to existing systems whilst also being able to pass the cyber-security protocols?
Moving forward, an effective collaboration will never be a short-term relationship, it will be a living, breathing long-term synergy. Given the myriad of fintechs in the current marketplace, it seems that traditional financial institutions will remain somewhat cautious for the time being, which could hurt customers and corporates alike.
However, the benefits of an effective collaboration between the two far outweigh the negatives. Should both banks and fintechs start to effectively understand the challenges posed, whilst focusing on innovation, agility and risk, then there should be no reason why happy and fruitful partnerships between banks and fintechs can’t be the order of the day.