Within the space of two years FinTech startups – those ambitious young companies that have set out to use technology to revolutionise the banking and financial services sector – have progressed from being nothing more than an interesting idea for the initiated to a present-day reality. New FinTech firms are founded every day in Cape Town, Nairobi, Palo Alto, Shanghai, Tel Aviv, Paris and London.
Some of them are targeting corporate clients while others are looking to revolutionise the lives of consumers: how they make their purchases, manage their savings and obtain loans. Payment methods, financial markets, loans, paperless transactions – nothing escapes these talented young ‘barbarians at the gates’. Every day we are made aware of just what added value these startups can bring. They are agile, brimming with ideas, and they can turn on a sixpence, changing their business model virtually overnight if the initial approach is not going according to plan. These are all qualities which major banking institutions often find difficult to generate and put into practice.
An Airbus A380 is not an aerobatic aircraft – luckily for its passengers. But it is not unusual for inventions tested out on small planes to end up driving improvements to the larger aircraft. Let us be clear: it is very much in the interests of banks to hook up with these new players that are well able to contribute the agility that banks so often lack.
But what might a bank do for a FinTech startup? Three things, basically: firstly, volume. When you manage money on behalf of tens of millions of customers worldwide – both companies and ordinary people – over many years you build up the kind of knowhow for which there is no substitute. Secondly, public trust. Major banks earn trust by virtue of the sheer size of their operations, which tends to promote their brand and boost their reputation. Whatever financial startups do, they still need to build sufficient trust so that corporates or private investors will entrust their money to them. When you want to invest your money or take out a bank loan, you do not want to take a gamble. Thirdly, the ability to meet regulatory requirements, which are continually being tightened with the aim of protecting savers and the economy as a whole. What with regulators at sector, national, and international level, plus various other authorities, the obstacle course that the banks of today have to negotiate is a daily challenge. New entrants cannot acquire this knowhow on the Internet. Clearly the authorities do have a role to play here, creating a stable, fair framework for all the players involved, so as to enable the development of an ecosystem.
Experience on an industrial scale, public trust and regulatory compliance: these are the three pillars of the banking business. As FinTech startups cannot lay claim to any of these fundamentals, and the banks are hardly paragons of agility, it can therefore be extremely beneficial for them to work together. And the benefits of such hook-ups are likely to grow, given the emerging competition from players that have a very different history – the major US tech giants PayPal, Google, Apple, Facebook and Amazon, and their Asian equivalents Baidu, Alibaba and Tencent – which are nowadays investing hugely in mobile financial transactions and services.
So the real competitors of banks going forward are already to be found on the computers and smartphones of all their customers. They are already in the market and it is up to the banks to meet the challenge! The banks have of course realised what is happening and they have the opportunity to re-invent themselves by focusing on their strengths. However, they may also decide to collaborate with companies that have the same DNA as those giant potential competitors, based on digital knowhow and the customer relationship. The fact that the major banks are acquiring or taking stakes in these startups on the one hand, and setting up special FinTech accelerators on the other, clearly shows their desire to go ahead with this type of collaboration. However if this approach is to bear fruit, a true ‘contract of trust’ needs to be drawn up so as to guarantee that FinTechs are able to maintain their integrity, remain agile and retain their powers of innovation if and when they are allied or linked to a major banking institution.
A contract setting out the ground rules of this virtuous cooperation will be key to obviating any mutual mistrust and to establishing a solid basis for a properly balanced relationship. This is the recipe both for FinTechs to get off the ground successfully and for major banks to achieve the necessary digital transformation, thus allowing them to add a new panoply of services to their traditional business.
Article first published on the website of leading French financial newspaper Les Echos