So much has been written and said in recent months about Fintech, i.e. the technology that is dramatically changing the world of finance and banking. Banks are starting to question the future sustainability of their business model, which – as is now evident – cannot and should not rely on a purely physical distribution channel, which is destined to disappear.
Recent experience has shown that in the short term banks with traditional models are not going to succumb to the new, young, technological companies. What financial institutions should understand, however, is the ability to take advantage from Fintech development, in terms of talent, ideas and scalability to a global audience. Actually, Fintech companies and traditional banks/financial service companies are already collaborating and building mutually beneficial partnerships.
For instance, the Fintech industry of Peer-to-peer lending, which is growing rapidly, is now seen by the banks in two ways: either a competitor or a partner. In a typical partnership, the bank performs as lender on P2P platforms, thus supporting micro and small enterprises – usually too expensive for traditional banks. Alternatively, the bank may choose to become referral marketing partner so as to use the platform for products cross- or up-selling. Today there are dozens of such partnerships all over the world. For example, Goldman Sachs supports Symphony, which develops a secure way for sell-side and buy-side firms to collaborate while staying compliant. Blend Labs works with banks and financial institutions to develop a more efficient underlying technology for mortgage lending. BBVA Compass has teamed up with OnDeck to offer loans to small businesses that would not otherwise qualify for bank credit.
A new, probably more important phenomenon is the evolution of this kind of partnership, which also includes the entry of banks (or other financial institutions, like Insurance in France) in the equity of platforms and the release of commitment. Ultimately, it’s a win/win scenario – tech companies and traditional banks are going towards cooperation rather than competition.
An important aspect that moves this industry, albeit sometimes in a hidden way, is the action (or consent) of national regulators. More or less certain rules, tax benefits and even National entrance into Fintech business have been significant drivers for its development. Where the state has taken such actions there has been a boost of Fintech development and cooperation with traditional lenders (the UK example is the most relevant here).
With growing success and increased investment, Fintech is still in its infancy. The convergence of Fintech and traditional banks will continue to grow and there will be a sharing of technology, talent and know-how. Traditional banks and financial service companies that will be able to take advantage from this scenario will become major benefactors of Fintech innovation: Fintech capabilities can help corporate banks address critical gaps in their portfolio, reach underserved segments, and deliver a high-touch, lower-cost client experience.
In short, fast-moving players that develop a thoughtful Fintech engagement strategy will be able to lock in strong partnerships, talent, and proprietary technologies and gain access to specialized services before the cost of acquiring those businesses climbs.