The rise of financial startups has taken bank bashing to new levels. FinTech has become a metaphor for all that banks should but could never be. Enough and more has been said about what banks need to learn, not to mention fear, from their new rivals.
But there is always another side to every story, and the spate of FinTech-bank collaborations is proof of that. Why else would FinTech companies do a U-turn to partner with the same banks they were supposed to slay? The truth is that while financial startups are doing some things right, they still have a lot to learn and gain from their traditional banking rivals.
Dealing with regulation:
There’s probably no better example than Lending Club, where dubious lending practices and lack of disclosure forced the ouster of its CEO, earlier this year. FinTech firms, which enjoyed a relatively free run until now, are slowly but surely being regulated in most parts of the world.
In an interview in November last year, a senior executive of Silicon Valley Bank said FinTech companies were struggling to navigate the maze of governing authorities and rules, many of which were framed in the pre-internet era. Most FinTech firms simply don’t know how to handle the regulations that are coming their way. And there’s no better teacher for that than the traditional bank. This is amply clear from the findings of an EIU survey of 100 bankers and 100 FinTech executives where, when asked to (self) assess banking strengths and FinTech weaknesses, more than 80% of respondents said that banks’ experience with regulation was an important strength and FinTech’s inexperience, an important weakness.
Understanding customer behaviour:
This complementarity between banks’ and FinTech’s strengths and weaknesses is very evident from the survey. For instance, banks see their existing customer base as an obvious strength, whereas FinTech is conscious of the need to build one.
This signals a compelling opportunity for partnership between the two. Remember that most FinTech companies have very sophisticated analytical abilities, but very little customer data given their short history and limited clientele. However, once they gain access to a bank’s rich customer data, they can fully exploit this resource — so far underutilised by banks — to understand customer behavior in great detail, and create even better products and experiences around it.
Even today, the most successful startups are just that — startups. One reason for this is that while FinTech firms excel at generating ideas and innovation, they don’t focus enough on business development. A second, equally important, reason is that the regulations in most countries stipulate that only licensed entities may sell mass banking products.
Hence one of the biggest lessons that banks can give FinTech is how to build scale. Even the smallest of banks have considerable scale in terms of customer base, financial resources, product and service portfolio, channel network, manpower and infrastructure, enabling them to easily take an innovative idea to the world. Recently, the Lloyds Banking Group announced a mentoring scheme for FinTech through which they plan to share their experience of the challenges and opportunities that are part and parcel of a business of that scale. Working closely with a bank would enable FinTech firms to tap into such valuable knowhow.
It might even allow them to piggyback on the bank’s licensed status, and also its access to financial networks, to sell a wider range of banking products. This is exactly what Lending Club and Moven are doing through their alliances with WebBank and CBW, respectively.
The storm of FinTech-led banking disruption seems to have moderated, and we are now witnessing the calm of collaboration. Both, banks and startups have realised that there is more to be gained from cooperation than confrontation. FinTech-bank cooperation can come in several formats such as incubators, accelerators, hackathons and other methods like corporate venturing.
In the seventh annual edition of the EFMA-Infosys Finacle survey on banking innovation, about one in five banks already had an incubator, either solely owned (Sberbank in Russia), or jointly with external partners (Barclays, DBS and Citigroup). For banks, such partnerships represent an opportunity to enhance innovation, agility and customer-centricity. But FinTech companies are equal beneficiaries, because working closely with banks allows them to gain access to capital and insights into how to run a business at scale, understand customer behavior, and manage risk and regulatory compliance.