This question has irked me ever since a meeting with two senior banking executives recently – one of a prominent foreign bank and the other of a leading private sector bank. The executive of the foreign bank wanted to partner to build a best of breed solution for their customers. While the private bank executive believed that they could build cutting-edge technology in-house itself, which left me thinking how the banking industry will respond to the fintech revolution, will ultimately shape the banking ecosystem and the customer experience of the bank of the future.
The Fintech community across the globe is booming. It has managed to garner much attention due to the untapped potential it holds, especially from banks and investors. In recent years, the number of fintech startups has exceeded 12,000. This was primarily driven by the wealth of venture capital riding the wave of the mobile, cloud and big data revolution. According to Accenture, global investments in fintech companies tripled last year, growing from $4 billion to a whopping $12 billion. Another study says, from 223 unique investors in fintech in 2010, it has gone up to 894 in 2015. And while this signifies that finally, the digital revolution has arrived in the financial services sector, it also holds the question regarding where banks will stand in the future, if the Fintech boom continues this way.
As per Goldman Sachs, “$4.7 trillion in revenue for traditional financial services is at risk of being displaced by new technology-enabled entrants. First generation online financial services companies, traditional banks, asset managers, and payment companies are all working to adapt to these behavioral, demographic, and technologic realities. We believe that partnerships, acquisitions, and competition will be instrumental in the way the vertical develops."
“Silicon Valley is coming. There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking. The ones you read about most are in the lending business, whereby the firms can lend to individuals and small businesses very quickly and – these entities believe – effectively using Big Data to enhance credit underwriting. They are very good at reducing the “pain points” in that they can make loans in minutes, which might take banks weeks.” - says Jamie Dimon, Chairman and CEO JP Morgan Chase & Co.
Which is not to say that fintech firms will replace traditional banks at least anytime soon. One might argue that no bank product comes close to matching the innovation, simplicity and convenience of a mobile based fintech product. But the reality is that the fintech revolution will rewire and rebuild the banking industry and most definitely will improve it. What is still unclear is whether this presents more of a challenge or an opportunity for traditional banks.
Banks and Fintech - A happily ever-after?
I see two possible scenarios playing out in the Indian banking ecosystem:
- Fintech companies vs. banks ie a David vs. Goliath scenario
- Fintegration where Fintech companies and banks collaborate
There has been more than $25 billion invested in an estimated 4,000 fintech firms in the past five years. These investments represent only a small fraction of the size of the overall banking industry. While there is a lot of noise in the industry about fintech startups gearing up to create a massive disruption, it is also facing challenges to its growth. The banking industry is trying to determine whether they should ignore, acquire, partner or compete with their new technology-driven counterparts.
If we look at the West for inspiration, banks and traditional financial firms have begun to move towardsscenario two.
There are 3 different approaches banks and financial services firms are beginning to take to collaborate with the world of fintech.
- One night stand
It appears that most Indian banks and financial institutions are treading water cautiously. Unsure of whether to compete or collaborate, build or buy, they are starting to extend their hand out in order to collaborate. A recent example of this is the ICICI Hackathon where the bank got together with a coding boot camp to provide programmers a chance to create solutions in the Banking and Financial services sector, and the winners were offered a cash prize of Rs.20 Lakh along with a potential engagement opportunity with ICICI Bank.
An example in Capital markets is Goldman Sachs’ putting its proprietary source code on the online collaboration tool called GitHub, which allows external coders to optimize it. In retail banking, Credit Agricole launched open APIs that enabled developers to build apps for its services, which allowed it to offer a range of new and innovative customer features.
- Next step of moving in together!
Many banks can act as incubators for the startup community. For instance, Singapore based DBS bank is sponsoring a 5,000 square foot co-working space for fintech startups in Hong Kong as a part of an accelerator program it is running in partnership with a local incubator. Besides office space, DBS executives will also offer mentoring for the startups.
Similarly, banks will have to find innovative ways to build long-term relationships with the fintech community, such that it is a win-win scenario for both the companies involved in the relationship. A good example of this would be the Accenture-sponsored Fintech Innovation Lab in New York City. Startups that join the program get mentoring from one of the 14 major financial institutions partnered with the lab, and the mentors work to help each startup develop a pilot with their bank.
Closer to home, SBI launched an initiative called InTech to team up with startups to create financial technology (FinTech) solutions for banks. Intech will be a space within SBI's startup bank InCube where interested startups with knowledge on financial sector problems will be given access to SBI's Application Programme Interface (APIs) to experiment.
"And these people (startups) with the APIs and with the knowledge of some of the problems that the financial sector is facing can actually experiment and come up with solutions. Initially maybe for the bank (SBI) and then obviously in many other financial institutions," said Bhattacharya, said SBI chairman Arundathi Bhattacharya.
- Preparing for the Proposal: She loves me. She loves me not?
Even though some banks seem to be coming to terms with Fintech, they have continued to struggle with how best to integrate technological innovations into their operations in order to stay competitive. Digitization is more than just shifting towards “mobile banking”. With studies and surveys showing a sizable shift towards digital, there is a glaring decrease in importance of branch interactions. Therefore, mastering ‘fintegration’ has now become paramount. Fintech has already claimed the re-imagination of banking. However, if integrated effectively, digital will not mean “disruption” of banks but rather the gateway to re-imagined banking. Banks such as Chase, Goldman Sachs, Capital One etc have all ramped up their Corp VC and innovations arms to invest in the future of Fintech. Goldman is the most active investor among financial services players and has invested in Circle, Motif, Square, Perseus etc. JP Morgan has also followed suit and made investments in many of the major startups such as Motif, Prosper,Square, Symphony, Can Capital etc.
An even more interesting fact is that, not just banks and organic financial institutions are showing interest but also big league players. For eg, Google Ventures has done 37 fin tech deals in the last 5 years. The other interested parties are Intel, Salesforce, SoftBank, Naspers etc
Are the wedding bells ringing?
In a report published by the Economist Intelligence Unit (EIU) titled: ‘The Disruption of Banking,’ over 100 senior bankers and 100 fintech executives were interviewed to ascertain the likely landscape of retail banking over the next five years. In this report, 27% of fintech executives cited that lack of experience in risk management, and 25% suggested that lack of necessary investment capital astheir greatest drawbacks. On the other hand, one section believed that limited product (34%) set and the other said the absence of legacy systems (33%) were their biggest strengths. Banks on the other hand have money, market reach, and existing customer relationships -3 elements that fintech startups would love to have and partner with. So, why not collaborate?
As banks go through a transformational stage, fintech firms and banks are beginning to realize the benefits of working with each other to deliver innovative solutions and a superior customer experience. For these companies, collaborating with banks will be a huge advantage as the biggest challenge they face is scale. To ensure a substantial ROI, fintech startups will have to ramp up millions of customers or transactions.
Another challenge is time. Keeping in mind that many startups work under the venture capital model, they would need additional sources of capital to scale quickly, and if they do, it would require them to become proficient in the art of risk management, ensuring data security and building technology to support these capabilities. And this is where traditional banks with greater capital access and complementary strengths fit in.
Phil Heasley, CEO of ACI Worldwide aptly summarized this debate well by saying that some really smart banks will survive by merging with some really smart fintech firms. The process could be summed up as ‘keep two cultures, but integrate the technology back office’. This solution can preserve the culture of innovation; marry it to the assets of the bank, and accelerate the combined offering to the market.The relationship between fintech firms and financial institutions may certainly look to be a complicated one, but just like any great relationship, leveraging each other’s core capabilities would reap great dividend for all stakeholders involved including the most important one - the bank customer.