Cooperation Instead of Competition Amongst Fintechs and Banks
The number of financial technology startups, mostly referred to as “fintechs” – companies specialising in the development of technologies with the aim to improve activities in finance – has experienced an interesting evolution over the last decade. In their 2018 study, Deloitte showcase what can be described as a bell-curve distribution of the number of globally founded fintechs. Steady but slow growth until 2010 was followed by two years of exponential expansion. Despite further growth until 2014, the rate of growth declined sharply already after 2012 and was factually reversed in 2015. The years of 2016 and 2017 saw a strong drop of newly founded fintechs, 41 in 2017 as compared to 668 in 2015.
The financial services market is usually segmented into four industry sectors. These are Investment Management, Banking, Insurance, and Real Estate. The above-mentioned distribution does not reflect an accurate proportionality of these sectors; however, this will not be the focus of this article. More interestingly, a shift in the interaction between fintechs and the incumbents of the financial sector has taken place which raises hope for future behaviour of market participants in capitalist societies. Ian Rand, CEO of Barcleys plc’s Business Banking UK, expressed what was resonated many times by other panellists during the Fintech World Forum 2019 which took place 21/22 May 2019.
Traditional financial institutions, such as banks, insurers or other financial service providers, initially did not pay attention to the first round of tech-savvy suppliers of new solutions to existing problems in finance. They were regarded no threat and their expertise in and focus on technological methodology had not been understood by the status-quo. This was followed by a long period of denial about the impact of those unconventional new market participants in the 2000s. With the aforementioned strong expansion of fintechs, this relationship turned into competition around and after 2010, as Rand explained talking about his banking peers’ prevalent behaviour during that time.
Finding the variable that indicates the reason which brought about change is complex. Market feedback made banks understand early on that they had to adapt. One such strategy was the development of apps to facilitate mobile online banking in order to keep up with banking products offered by young financial technology ventures. The latter did then and still do aim to create a better user experience for customers, such as easier online payments, reduced transaction fees, an aesthetically pleasing design or improved security by implementing cutting-edge insights from universities. However, despite the fact that banks are innovators as well, there are factors that make it hard for them to achieve the same results as tech-startups.
The environment naturally plays a crucial role, but a change-bringing mindset is a stronger driver for motivation. Many young software engineers write their dissertation on projects they currently develop and implement at technology companies which – as opposed to main street banks – create an unconventional, adaptive work environment based on the respective workplace philosophy. Employees benefit from horizontal hierarchies which in turn produce amplified feedback. This feedback – positive or negative – is input that accelerates their learning experience. This as well as banks’ deterrent reputation illustrates why bright graduates choose fintech firms over banks, and explains why banks had to change their mindset during the earlier-mentioned fintech expansion.
Hiring third-party technology firms is not ideal for banks, especially not for smaller ones. Communication is less efficient, a lack of understanding of each other’s work culture is hindering, and smaller banks cannot easily switch their provider since this is linked to additional costs, project management complications and complexities, time loss, etc. In order to avoid these troubles, managers such as Ian Rand or Edoardo Volta, VP Head of Fintechs at Mastercard, emphasize the importance of cooperation instead of competition, given these foregone developments. Mr. Edoardo sees more potential in allowing financial technology firms to get a share of the market, while simultaneously collaborating with them and consequently improving his own products and changing according to the needs of the market.
Most panellists of this year’s Fintech World Forum in London from the banking side admitted they had to learn this lesson rather sooner than later. Other possible consequences would have entailed a stalemate-like situation for both conventional financial service providers as well as financial technology firms, which have been well-researched and are understood to be prone to disruptive change, whereas collaboration of this variety is known to be flexible and robust. These examples illustrate positive change through collaboration on the highest economic level.
Author: Patrick Lehner