New World Tactics. How Banks and Fintechs Learn to Collaborate
Banks have long ruled the show on the financial market. So long that it seems as if it’s always been the case. Well, all of a sudden we have the fintech startups ready and raring to go. It took some ten years for these small projects to become large companies and grow in some investment and clients. They even managed to attain the impossible and move banks from their lofty perch.
Some already say that banks will disappear leaving the way for progressive solutions. Well, perhaps it is going to happen in some very distant future but definitely not tomorrow morning. Or even afternoon.
Unsuccessful attempts at ignoring
2007-2008 brought a serious mortgage crisis to the USA. It gradually grew into the financial and economic one covering the entire world. The crisis hurt banks a lot causing their mass bankruptcy.
Of course, they could not give loans in such conditions not even mentioning any types of deposit accounts. The same banks remaining afloat had to abandon the lending services being under the pressure from regulators.
Unlike the online lending services (P2P), which hardly depended on anyone. Anticipating its advent, the very first of them had appeared in the U.S. a year or two before the crisis kicked in. Take Prosper and Lending Club for example.
At the start, they were treated with caution at first just like anything new. Yet after the crisis, borrowers flooded those two. So, we can see the history behind the finest hour of P2P platforms and financial technologies as a whole.
Banks have ignored this potential competitor for a long time considering it too small of a fish for their stock. And they had every right to do so. After all, the value of largest fintech startups ranges from $500 million to $5 billion now, while the value of Wells Fargo exceeds $250 billion. The difference if self-evident.
Still, financial technologies showed an incredible growth almost immediately. Even now it offers a great many of progressive solutions. For instance, applications for money transfer, insurance registration, services for designing investment portfolios.
There are digital banks allowing to solve a wide range of financial issues. Working with them is easier and faster than with a conventional bank since you do not need to stand in a queue, fill some application forms, etc. You don’t even need to go anywhere, just run your application.
However, the fintechs went even further and started developing complex B2B solutions. There are already algorithms for countering the money laundering for example.
Investments in the fintech grew 10 times between 2010 and 2015. At the same time, the industry caught the attention of regulators. Contrary to the banks expectations, not only did they not impose any restrictions but contributed to its growth. For instance, the European PSD2 (Payment Service Directive) has granted access via API to the data on account balances in any bank allowing them to make payments and transfers to third-party companies. In Europe and USA, regulators create the so-called “sandboxes” – special areas free from regulatory pressure to test the fintech products.
All this in itself is a red flag for banks. And, perhaps, the last decisive factor for them was the outflow of young clients.
Young people do not like the conservatism of traditional financial institutions, which is expressed both in the service and in the digital products they offer. They are much more compelled with the ease-of-use and availability of fintech solutions.
As the Facebook IQ and MasterCard surveys taken in 2016 show that 93% of young people do not trust banks in the USA. Another 45% reported their readiness to abandon their services and enjoy only the fintech solutions. That is a big blow for conventional financial organisations since it is largely the millennials that constitute the largest consumer group. In these circumstances, banks needed to change something. Which they did.
In recent years, we can see potential competitors becoming partners and uniting to develop joint projects. Many banks even buy the successful fintech developments. For example, a popular digital bank Simple was bought by the BBVA.
It is fair to say that involving the youth is not the only reason for cooperation. Both parties receive other benefits in this case as well.
United we stand, divided we fall
The cybersecurity issue is one of the core issues when it comes to innovation. Alas, fintech solutions cannot guarantee the entire security for users.
That is why many still do not trust these technologies using them only for solving short-term tasks (such as getting a loan or money transfer). Users mostly avoid more serious projects, namely from the B2B segment, preferring to work with banks that have long proven themselves in this business. As a result, fintech companies lose a significant portion of income.
Banks, in turn, can expand their client base using financial technologies and enhance the service quality. Notably, with the access to accounts via API they can be servicing both their own and other clients using their interfaces.
Thus, the need for two parties cooperating is obvious and rather a matter of time. Slowly, this time comes.
Now, over a half of the largest world banks use fintech solutions one way or another. Generally, they use the works in cloud technologies and big data analytics.
For instance, HSBC uses the best practices of the fintech Tradeshift, which is based on the Ribble protocol allowing to conduct various types of financial transactions remotely.
The Canadian Imperial Bank of Commerce has entered into an agreement with the Borrowell allowing clients to obtain instant credits. Scotiabank followed in this example along with the startup Kabbage. These examples are many and there will be more in the future.
That means that the ice broke up. The snowball is rolling, the process is irreversible. Still, we are yet to find out the way it ends. Perhaps banks will be entirely taken over by fintechs or, perhaps, fintechs become some sort of financial IT giants. For now, all we can do is wait and monitor the situation further.
This post is also available in: Russian