Most conversations around banking and Fintech feature two themes – API monetization and digital innovation. However, that’s where the similarity ends, because the two impact the banking industry in very different ways.
ING was the first major bank to see a potential alternative business model in the digital banking landscape when they launched ING Direct, way back in 1997. But although they wound down their operations across the United States, Canada and the United Kingdom in 2012 as part of restructuring, they did not give up on the concept and have since innovated in pockets across Europe and Australia to capture market share as a digital-only player. This was because they followed the concept of a model bank across Europe except in Germany, where ING-DiBa was already a key market player with $154 billion in deposits and more than 8 million customers. Also, their recent partnerships with Scalable Capital and Kabbage indicate that partnerships can be scaled from one region to another as long as the fundamental business model is sound. ING’s 115 partnerships with Fintechs in 3 years have won them a marquee client base, bolstered their ability to delight their customers using new age tools for customer engagement and offered some unique investment avenues. This has also been solidified by their commitment to ING Ventures, a EUR 300 million fund that invests in Fintech companies
The key Fintech themes that top U.S. banks have been investing in include: Blockchain, Data Analytics, Insurance, Personal Finance, Wealth Management, Financial Services Software, Lending, Payments, Real Estate, Regulatory Tech and Supply Chain. What’s interesting in this mix is that investments in data analytics, financial services and lending are higher in volume clearly indicating banks’ desire to monetize their investments at the earliest possible instance. Data analytics, financial services and lending are primarily API-driven monetization feeders for banks and are easily related to the business as compared to other novel innovation themes where mainstream adoption is still not in sight.
The key differentiator for challenger banks in recent times is the much-touted ‘marketplace’ that aggregates services for consumers to pick and choose from. Revolut, N26 and Fidor have been early advocates of this and more recently, Starling, Monzo, Atom and Tandem have also adopted it, understanding the value potential of routing a large volume of transactions through their platforms. This brings us to the next question – what do the monetization models for both the parties look like and what kind of profits can they potentially fetch. A classic example here is LendingWorks, a P2P loan provider with a tie-up with Revolut. Since 75% of LendingWorks’s business is driven by its API-driven partner network, it is a clear win-win for all. But not all Fintechs have this kind of business model to succeed in the game. Hence, there is potentially a distinct need for reselling white labeled products / services as well as striking investment level partnerships in the form of joint ventures for this model to sustain itself.
Given these diverse scenarios, banks will have to align their corporate, technology and business strategies to win in the API-driven economy, where partnering with Fintechs is inevitable.
Davis, A. (2018, March 17). Are marketplaces the future of digital banking. AltFi, p. http://www.altfi.com/article/4204_are_marketplaces_the_future_of_digital_banking.
Retrieved from http://www.altfi.com/article/4204_are_marketplaces_the_future_of_digital_banking
Economist. (2017, Dec). Dutch, digital and doing nicely. Economist, pp. https://www.economist.com/news/finance-and-economics/21731160-approach-came-unstuck-crisis-has-provided-foundation.
ING. (2017). ING-launches-ING-Ventures-a-EUR-300-million-fintech-fund. pp. https://www.ing.com/Newsroom/All-news/Press-releases/ING-launches-ING-Ventures-a-EUR-300-million-fintech-fund.htm.
ING. (2017). ING-starts-partnership-with-Scalable. pp. https://www.ing.com/Newsroom/All-news/Press-releases/ING-starts-partnership-with-Scalable.htm.
Insights, C. (2018). fintech-investments-top-us-banks. pp. https://www.cbinsights.com/research/fintech-investments-top-us-banks/.