31 December 2015
Banks and fintech; from fear of to need for each other
They were supposed to disrupt modern banking, but in reality, financial technology companies are more eager to cooperate with banks, rather than to overrun them. The relationship between banks and fintech firms is much closer than just being each other competitors, according to the Wall Street Journal. It proves that the banking sector is open for innovative initiatives, but all of the innovators need the banking infrastructure to succeed, it seems. Or, as the Wall Street Journal put it: ‘the relationship status between bank and fintech firms is complicated’.
Financial technology firms have been seen as agile and innovative competitors to banks. Although banks have a proven track record in overall financial services and that they’re trusted by consumers with managing their money, fintech firms concentrate on a specific task with a specific technology and excel in that. This makes them quite a difficult competitor because traditional banks find it challenging to adapt to changes, especially in this digital age; they just aren’t as fast and flexible as a start-up.
More funding in fintech companies as ever before
That is why it is no surprise that this year investment in the fintech industry has taken a great leap. According to KPMG and H2 Ventures the level of funding exceeds 20 billion dollars. “To put this in context; that was 100 million dollar in 2008”, wrote ZDnet. It is expected that by 2017, fintechs will have collectively raised in excess of 30 billion dollars. This shows that financial tech companies are growing rapidly in these digital era, while banks are struggling to embrace these new times.
This was also acknowledged during this year’s 2015 ABA National Convention, where innovation in banking was discussed. One main takeaway, according to Forbes, was that banks should take note from start-ups, because they know how to run lean, and have mastered the art of streamlining their operational processes on both the front end and back end, they are able to brand themselves and they invest in data collection and data management. The fintechs were perceived as disruptors in the sector, but times have changed due to new insights.
Cooperating in stead of competing
It seems that banks and fintechs now realize that they accomplish more when they are cooperating in stead of competing. The foundation of this belief lies in the relation between getting customers and the need for growth. “Banks not only compete with the start-ups for customers but also provide some of the key infrastructure they need to grow. The lenders can provide financial startups with capital as well as legions of depositors and expertise in dealing with regulators,” wrote author Daniel Huang at WSJ.com.
In “2015: The Year Fintech Really Took Off” at BobsGuide, Andres la Cour also predicts a closer relationship between banks and the innovative fintech companies. Not only do governments see the possibilities of innovations for economic growth, banks have also embraced the chance of being empowered by the disruptors. “In 2015 there was a growing groundswell amongst the traditional banks to get involved in the fintech sector, with a genuine interest in extending their services to deliver better value for customers”, says La Cour.
How to get B2B payments moving?
He thinks that the new breed of disruptors can finally get B2B payments moving. “It isn’t just a question of charging less than traditional banks and cutting them out of the picture, fintechs can collaborate with banks to help them successfully move into the digital payments market. In turn, banks can offer the fintech companies additional security through their regulation, offering added peace of mind to their customers, as well as dragging the payments process into the future.”
Consumers demand innovation
On the consumer side, there have been mixed signals concerning the actual use of new payment technologies. For example, cash payments still remain popular in France, Germany, Italy and Poland. Across Europe, cash and debit cards still continue to beat out new payment methods. Similarly, research performed by Market Force Information showed that fewer people are actually using digital wallets to make payments or receive money in the US. However, customers are increasingly depending on this new technology to make shopping easier, such as storing loyalty cards, coupons and gift cards.
Nevertheless, in some European countries, like the UK, new payment methods are increasingly embraced. Also, the UK is one of the countries that has been identified as being in the forefront when it comes to instant payments. Besides the UK, Italy saw an increase in both mobile payments and purchases.
Innovation is never without risks
These disruptive changes in payments are, however, creating a growing need for banks to modernize their core IT systems. Their legacy systems are holding back business agility and customer service quality, but also lead to IT security risks, operational failures and downtime, and incidents of undetected fraud.
In the first month of 2015, Internet security firm Eset predicted a rise of attacks on online payment systems and in Internet of Things cyber attacks. According to Websense, this trend will continue in 2016: ‘Mobile wallets and new payment technologies will introduce additional opportunities for credit card theft and fraud. Hacks targeting mobile devices and new payment methodologies will impact payment security more than EMV. The increase in non-traditional payment methods on mobile devices or via beacons and smart carts will open up the doors for a new wave of retail data breaches.’
It is fair to say that 2015 has been a year where the fintech companies changed the perspective of the banks. What began as a fear of disruption has evolved into a cooperative state of mind. The first step has taken, but both parties are needed to really improve the financial services for consumers.
I’m looking forward to what will happen in 2016 and the new possibilities of these joint forces.