Rethinking Banking (With Fintech)
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I wrote last month about the impact of leaving my former career in banking to run a fintech startup. When I made the shift, expecting a life of independence and changing the world of finance, I wouldn’t have envisaged that in five years’ time, I would be spending most of my time working with banks. I recently came across a survey that noted that the greatest focus of banking executives at the moment was in “investment in innovation,” though their lowest priority was to “invest in or partner with fintechs.”
This seemed bizarre- the banks’ own management know fintech companies are what they need, but they are doing nothing about it! I shared this on LinkedIn and asked my contacts their views, and I was deluged with comments, from those in my network and outside, and from those working in fintech and other industries. I was surprised at the obvious level of pent-up frustration people have with banks. The underlying reason for all this is, I feel, is because of how difficult it can be to access the simplest of services from banks. At my company, NOW Money, opening a simple account to receive funds from venture capital investors and pay our bills from took six months. This seems ridiculous, but we’ve been told by other companies that have been through the same process that managing to do it in only six months is an impressive achievement in its own right!
I will leave it to your imagination to think how hard getting the other parts that allow us to operate were: for instance, a customer funds account and BIN sponsorship (allowing us to issue MasterCard payment cards) took two and a half years- and we are at the top of our game in terms of security (we are DSS PCI certified), regulation (Central Bank of the UAE have been supportive in issuing certificates explicitly permitting regulated firms to work with NOW Money), money laundering controls, as well as the “traditional” elements of banking that are important in stopping financial crime and other issues.
Given this state of affairs, the comments to my LinkedIn post brought to the surface the intensity of the frustration felt by others across industries, which echo our experiences to date. The reasons for such failings are many, and they require a completely separate article to go into any detail on them. However, at its core, the issue is that banks have to do so many things they are not set up to do. The historical core business model of banking is to take deposits from customers, and lend these funds to other customers. Profit comes from charging customers that lend from them a higher rate of interest, than they pay to customers that leave deposits with them. They also provided the infrastructure that allowed customers to transfer money to one another, and make payments for services. Historically, banks focused on the small elite of wealthy customers and their businesses, and then over time, slowly added services to create further opportunities to make profit. However, in recent years, the rate of change has reached break-neck speed.
Banks are now expected to bank the wealthiest private banking clients, as well as the millions of lower income customers, with equally high levels of service. They must bank sole traders, and provide the full range of services to the largest corporates and governments to compete. They must offer the latest apps for customers to access services, retain the highest levels of security, and respond to a rapidly evolving regulatory landscape, all at the same time. It is -simply put- too many things for one organization to do effectively. This is why there is such a groundswell of frustration with the banks from across the board- you, me, my LinkedIn contacts, SMEs, and corporates. We’re all being serviced by banks, but not effectively.
Fintech has given rise to companies who pick off parts of a bank’s offering, and do it better. They can do it better, because they have a sole focus on one goal, which allows them to build everything around achieving that. The UK and Europe leads the way in fintech companies that have taken off- some examples are Transferwise and World Remit that have focused on sending money abroad, which banks offered, but the process was slow, and was also priced too highly. Monzo and Starling have picked off current accounts- again, things banks did before, but they could focus on them with a blank sheet of paper, and do them much better. Nutmeg have offered investment management for everyone- in a cheap and easy-touse environment. Once again, banks offered this before, but they did so poorly, and to make it break even, they had to charge customers high fees.
The environment for fintech startups is more difficult in the MENA than in Europe, but we’re seeing the start of the same phenomenon. Here at NOW Money, we focus on low-income workers and their remittance needs, a forgotten segment of the population for banks. Our counterparts in this field include FlexxPay, which is focusing on quick, simple salary advances, while Beehive is tackling SME lending.
So, are fintech companies going to gradually eat further and further into banks’ operating model, until banks no longer exist? From the point of view of a fintech founder, this feels unlikely. A lot of the time, banks don’t actually mind fintech companies doing things that they service poorly, and/or don’t make money on. This is because these very fintech companies need the banks to be able to operate, and the bank often retains the valuable piece. For example, with NOW Money, we benefit from transactions, but we’re required to hold funds with a bank in the UAE who therefore benefits from holding the deposits of our thousands of customers (and gaining interest on this), without needing to do anything.
As for the future: what will banks and fintech companies look like in 2030? Fintech companies will continue to take customer-facing parts that banks are happy to give up, until there are few areas that banks still directly interface with customers. I spoke at the start about the survey that suggested that banks’ executives know they need to embrace innovation, but are not planning on investing in fintech startupsbut this will change due to market forces.
However, I also believe the banks will sit behind these fintech companies, ambivalent about which succeeds or doesn’t- if one fails, another will be slotted in. They’ll let the fintech companies fight it out for the customer’s attention, and sit behind them, providing the infrastructure allowing them to process transactions and hold deposits, thereby retaining a large amount of the value, and also being a necessity for regulatory requirements. So, will banks disappear? Almost certainly not. Will they be just as powerful as they are today? Close to it- but in a less outwardly visible way than they are currently. Will you, I, and my LinkedIn followers have the same levels of frustration? No- because the fintech companies we will be interfacing with will be focused and give great service, and the banks will be sat behind them, doing what they originally set out to do- take deposits, lend this money to others, and provide the infrastructure to allow payments and transfers to happen.