New article series from the SWIFT Institute in collaboration with the University of Pennsylvania’s Knowledge@Wharton explores today’s industry challenges
The fastmoving world of financial technology, better known as fintech, is settling into a global pattern. Disruptive fintech startups not long ago were thought to threaten important revenue streams of even the biggest financial institutions. But they are now pursuing business models based on collaboration with banks or even being acquired by them. And banks increasingly see ways they could improve customer service by working cooperatively with the nimble entrants, which are unconstrained by layers of bureaucracy, regulation and conservative corporate cultures unused to rapid change.
But don’t expect total harmony, say experts. Some fintechs will aggressively go it alone and challenge the legacy banks in their most lucrative markets. And recent rule changes in Europe, which force banks to transfer closely guarded customer information to fintechs upon customer request, will add new momentum to the upstarts.
Still, the drive towards collaboration is well underway, as the following ontheground examples suggest.
- ICICI Bank, India’s largest private bank, and Paytm, the country’s largest digital payments platform, have jointly launched a digital credit account on the Paytm app. PaytmICICI Bank Postpaid gives customers access to instant microcredit for everyday expenses — from bill payments to movie tickets. Its algorithm – from ICICI – is based on a customer’s financial and digital behavior and evaluates creditworthiness in seconds.
- Bocom International, the investment banking arm of China’s Bank of Communications, has partnered with Hong Kong fintech firm FDTAI to develop intelligent, personalized investment research based on bank clients’ past transactions. The hope is to offer more tailormade investment advice.
- ING Group has partnered with Scalable Capital, a leading online wealth manager and roboadvice firm in Europe, to offer a fully digital investment solution to ING’s retail customers starting in Germany. Customers do a paperless registration in under 15 minutes. With a minimum investment of 10,000 euros they can monitor their portfolios on both Scalable Capital and ING mobile apps and online portals.
- Kabbage, a U.S.based leading online lender, has partnered with large players such as Scotiabank, for streamlining online lending; MasterCard, for business loans through MasterCard’s network of acquirers; ING, to provide capital to small businesses; and Santander Bank, for loans to small and medium enterprises.
These moves by financial institutions and fintechs in India, China, Netherlands and the U.S. show just how globally the imagined natural differences between traditional financial institutions and creative, disruptive fintechs continue to shift from competition to collaboration.
Incumbents that don’t seek to partner will die.
The financial services sector is going through the same kind of digital transformation that media and commerce went through in the 1990s and telecom went through in the 2000s, says Mike Sigal, Partner, 500 Fintech & Cofounder, Upside Partners and founding executive producer of Innotribe, an initiative of the SWIFT bank messaging cooperative. History suggests that when the industry shakes out the leaders left standing will be a mix of incumbents that move aggressively to adopt new technologies, and some new entrants. Incumbents that don’t partner “will die,” he says. “Smart incumbents realize that they can benefit from the insights and agility of startups, while startups have understood that the scale, reach, stability and regulatory management of incumbents can be helpful.”
Indeed, fintechs can pose an existential threat to banks. Kartik Hosanager, Wharton professor of operations, information and decisions, sees fintechs as “definitely a big threat to banks,” especially in service areas that are capitallight and where “fintech products offer new capabilities that are hard to offer in nontech products.” A classic example is marketplace lending. Here, fintechs take advantage of the capitallight aspect of a marketplace to offer lending services at lower costs.
Further, they can leverage new data from social platforms and elsewhere to improve their analytics. “In areas like student lending, fintechs have already made sufficient inroads. Companies like Square (credit card processing) and others who use mobile devices as cheaper pointofsale systems are another example.” But Hosanagar thinks fintechs will likely find it hard to penetrate capitalheavy services such as wholesale banking and mortgages.
Hosanagar expects “a lot of coopetition.” Take mobile wallets. Most big banks like Chase and others have mobile wallet solutions that compete with Apple Pay and Android Pay. These companies also work together to offer a seamless service to any user independent of which device and card she uses at a retail store. Roboadvisors is another case. Incumbents like Schwab and Vanguard have roboadvisors that compete with fintechs like Betterment. At the same time, banks like Citizens Bank have partnered with fintechs to offer roboadvisor capabilities to clients.
According to the World FinTech Report 2018 produced by Capgemini and Linkedin, in collaboration with the European Financial Management Association, 75.5% of fintechs surveyed want to collaborate with traditional financial services firms. Only 18.1% want to compete on their own. The rest want to be acquired by other fintechs or traditional firms.
More than 55% of fintech executives said “gaining visibility, achieving economies of scale, earning customer trust and establishing a better distribution infrastructure” are crucial reasons for partnering with incumbents. “Such a mindset and logical fit of complementary strengths make a strong case for collaboration for today and the future,” says Sankar Krishnan, executive vice president for banking and capital markets at Capgemini.
The Trust Factor
For the upstarts, tapping into the goodwill and trust that incumbents have created is a strong draw. Hosanagar says: “Trust is extremely important for financial services and is not easy to build overnight. Institutions that have been around for decades, if not centuries, have an edge with trust.” Rob Morgan, vice president of emerging technologies at the American Bankers Association, adds: “I may be willing to get into someone’s car for a few minutes without a lot of trust. But when I give you my money, I really need to trust you. When banks and fintechs pair together, you get the best of both worlds and customers can get the new innovative services they crave from a trusted partner.”
Morgan also points out that fintechs typically focus on narrow areas and develop competitive solutions. But unlike, say Uber, which provides a full replacement for the service it has disrupted, fintechs do not replicate the entire suite of banking services. This limits their ability to disrupt the industry as a whole.
Trust is extremely important for financial services and is not easy to build overnight.
Another huge impetus for fintechbank collaboration is the growing threat from large technology players such as Google, Apple, Facebook, Amazon and Alibaba — popularly grouped as GAFAA. Vivek Belgavi, partner and India fintech leader at PwC India, points out that they can “develop unique solutions because of their huge base of frequent customers, large data sets and technology pool.” JeanPhilippe Vergne, strategy professor at the University of Western Ontario in Canada, notes that in China big tech is “already reaching more fintech customers than big banks.” Suggesting that the banks must “leverage the technology developed by fintech startups to compete against big tech by using licensing agreements, acquisitions, partnerships or direct investment,” Vergne considers fintechs at present to be “more of an opportunity for big banks than a threat.”
Yet, it’s not as if the marriage between the large, veteran firms and the upstarts do not carry risks. Ravi Bapna, professor in business analytics and information systems at the University of Minnesota, “doesn’t see a natural cultural fit.” Since legacy financial institutions “haven’t really focused on reducing frictions faced by consumers and organizations,” the threat to banks “is real.” Fees charged by credit cards to merchants, he thinks, will be disrupted in the same way that brokerage fees are going to shrink in the era of exchange traded funds and innovators such as Robinhood (a zerocost trading platform), and how the investment banking business is threatened by the direct listing of Spotify’s IPO. The newer models are made possible by automation, machine learning and artificial intelligence (AI).
Bapna also points to disruptive models in places such as China and India. Ant Financial in China, as an example, has regular interactions with 450 million consumers for payments. That is the “stepping stone for every imaginable financial product” like credit, working capital loans, insurance, pensions, etc. “at a fraction of the cost of legacy institutions, which are encumbered by the preInternet, preAI based operating models.”
The India Stack ecosystem, he notes, is another interesting model. “By designing an open, application programming interface (API) platform that others can innovate on, it has the potential to even disrupt the disruptors like Paytm,” says Bapna. He adds: For now, “the Indian government has completely waived transaction fees for persontoperson transactions. This should send shockwaves to credit card companies that charge 3% to 4% of transaction value.”
Stay tuned for part two of Banks and fintechs: Adversaries or partners?
This article was produced in collaboration with Knowledge@Wharton (http://knowledge.wharton.upenn.edu/ ).