The competitive rivalry between banks and fintechs is hotting up.
On the one side, fintechs are employing new technologies to undercut established pricing and win over customers with intuitive design. On the other, banks have significantly more distribution power and troves of customer data.
Could it instead be a tale of complementary opposites?
“The days of owning the value chain end-to-end are well and truly over and the successful companies are the ones working out how to consume the successes of fintechs through open APIs to preserve the value of their brand,” Capgemini banking and financial services practice leader Philip Gomm says.
It is also known as co-opetition rather than competition – a surprising strategy that could stave off a major threat to the incumbents. While fintech has made few inroads to date, up to 40 per cent of the banking industry’s consumer finance revenues and 60 per cent of profits are at risk by 2025 according to McKinsey & Company
Co-opetition can also provide fintechs with a sure path to customer data, which can be used to fine-tune products.
Big banks are increasingly the power
behind smaller companies which rely on them to fulfil the products they sell such as loans, credit cards or FX trading.
Lending Club, for example, uses new technology
to offer competitive credit by bringing borrowers and investors together – however its loans are provided by Utah-chartered industrial bank WebBank. The company floated in 2014 but, more recently, has suffered financial problems.
The commercial imperative to work together may be even stronger for fintechs than for the banks given few fintechs have attracted significant market share in lending, deposit-taking and other business lines. McKinsey and Co says
PayPal remains one of the few fintech companies to successfully disrupt the banks.
“In the eight-year period between the Netscape IPO and the acquisition of PayPal by eBay, more than 450 attackers – new digital currencies, wallets, networks, and so on – attempted to challenge incumbents. Fewer than five of these challengers survive as stand-alone entities today.”
Co-opetition can also provide fintechs with a sure path to customer data, which can be used to fine-tune products. Banks effectively own this customer data although that is slowly changing.
The UK is rolling out
an open-API standard which will apply to banks while Australia’s Productivity Commission is investigating
the benefits and costs of making public and private datasets more available.
No bank executive is taking the challenge lightly with other strategies including direct venture capital investment and the launch of in-house innovation labs
Banks not taking challenge from fintechs lightly
The co-opetition strategy itself is not without risk.
“The substantial value that banks generate from distribution may be captured by others,” says McKinsey’s Global Banking Annual Review 2015 report, ‘The Fight for the Customer’.
“Margins will come under pressure and the customer relationship, a platform from which banks sell other, higher margin, fee-based products, will be weakened or might even disappear.”
And yet no bank executive is taking the challenge lightly with other strategies including direct venture capital investment and the launch of in-house innovation labs.
In time, disruptors become mainstream
Fintech start-ups typically have the benefit of using new technology, a sharp focus on a specific customer segment, and a lighter regulatory regime.
But in time, disruptors typically become part of the mainstream in one form or another, according to Gomm.
“As they become more familiar with challenges such as compliance and building customer trust they reposition themselves from ‘disruptors’ to ‘solution providers’.”
He points to Ripple, which began as a blockchain-based disruptive payment protocol until the company instead began partnering with the banking sector on a number of related projects. For example, the ANZ, Commonwealth Bank and Westpac have recently worked
with Ripple to develop technology to allow bank transfers.
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