Australia’s banks have recognised that fintechs can be a source of innovation they can’t access in-house, but there is the risk the fintech runs out of funds during lengthy negotiations with a bank.
In a trend known as co-opetition, banks and other financial institutions are partnering with fintechs to help solve problems they can’t solve themselves.
Arrangements vary between joint ventures, direct investment or service agreements, and different banks are taking slightly different approaches.
Westpac has committed $100 million to fintech venture capital through its fund Reinventure
and the National Australia Bank has its own venture capital arm NAB Ventures
, which has invested in businesses such as global payments app Veem and small business financial software provider Wave.
Superannuation funds are also increasingly interested in partnering with fintechs.
Banks and other large financial institutions globally initially considered the rise of financial technology as a threat and responded to by trying to keep all of their innovation in house, but found they couldn’t get a lot of their innovations to market, according to Alex Scandurra, the CEO of Stone & Chalk
, Australia’s largest fintech innovation hub.
“There is a growing self-awareness and recognition that some of these problems are really hard to solve and no bank can do it alone”
Firstly, many banks are hampered by what Scandurra describes as “a spaghetti network of systems that are being patched together and don’t talk together very well, which require a lot of manual processing to convert data from one system to another”.
Secondly, in the wake of the Global Financial Crisis, regulators have tightened their controls on banks and their lending ratios and in some jurisdictions have gone as far as making it illegal for them to invest in fintech. “In other cases, because of sensitivities around their reputations, they’re too risk averse to venture into new areas that are uncharted in case they don’t work out,” he says. What’s interesting is that this isn’t just the case for big banks, big institutions everywhere are facing the same problems because they haven’t realised that inside-out innovation is only a part of what’s required to succeed moving forward.
New ways of innovating
“All these dynamics add up to making it exceptionally difficult for some organisations to try lots of new things that aren’t proven, tested by maybe ten others beforehand. And so, when you couple that with the sheer complexity from a technology perspective internally, there’s a lot working against them in terms of trying to get stuff out the door" states Scandurra.
The trend signals a major shift in the way the banks innovate and develop new products and processes, from previously being impenetrable and trying to do everything in-house.
“There is a growing self-awareness and recognition that some of these problems are really hard to solve and no bank can do it alone,” says Stuart Stoyan, the chair of Fintech Australia
For the banks, co-opetition provides access to capability and innovation they might struggle to achieve in-house. For the fintechs, the benefits can include venture capital funding, distribution or access to the bank’s customers, or having the bank itself as a customer.
Ultimately, says Stoyan, co-opetition is about eliminating friction in financial services and improving overall end customer outcomes – whether with direct customer involvement or whether that is improving processes, such as speeding up mortgage application times for the benefit of the end customer.
Stoyan has his own experience of co-opetition. MoneyPlace
, the peer-to-peer lender he founded in 2014, was purchased by non-bank lender Liberty in January, but will continue providing personal loans under its own brand with its own staff. It also partners with Auswide Bank.
The risk that a major bank smothers the innovative culture of a fintech or stops them from effectively competing in a market has diminished, but Stoyan says the greatest risk for fintechs comes while they are discussing a deal or investment with a financial institution.
Running out of runway
Fintechs have only a limited runway of funding and there is a risk their funding runs out in the six or 12 months it might take for a bank to agree to a deal because of its slow internal processes.
“It can be the death of the fintech if they just focus on one opportunity alone and that opportunity never eventuates,” Stoyan says.
While the term “co-opetition” suggests co-operation between organisations which might be competitors, Alex Scandurra says that in reality this isn’t always the case. In many instances a fintech start-up isn’t a competitive threat to a large financial institution and the financial institution is wanting to tap into a new source of innovation rather than protect itself from a potential competitor.
“The future source of competitive advantage for any existing organisation is its ability to attract the best start-ups to want to come and knock on its door first and say, “Hey, how about we partner together?”
The proposed open data regime for fintechs will also drive co-opetition.
“Which, of the two following scenarios, is likely to be most successful – the bank that digs in its heels and makes it as hard as possible to share data and is therefore limited in its ability to provide new services to its customers and potentially benefit from new revenue streams?" says Scandurra.
"Or the bank that decides to provide the most attractive marketplace of services for its customers by leveraging the best talent available both inside and outside of the organisation. They implement the easiest commercial process for start-ups/scaleups and third parties so that the best in the market want to partner with them first”.
“This new paradigm of “outside-in” innovation is what is at the core of Stone & Chalk’s work with our corporate partners” says Alex Scandurra. “We believe that this is the new source of competitive advantage for large organisations which has the multiplier effect of helping to scale Australia’s new wave of technology companies.”
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