IO

The survival of banks in the digital age

Antonio Lafiosca, BorsadelCredito.it | March 23rd, 2017

VC-backed Fintech companies raised $12.7B across 836 deals in 2016. Europe Fintech deal activity reached five-year high, rising 11% compared to 2015 and 124% compared to 2011’s total. Indeed, European VC-backed companies raised $1.2B across 179 deals.

This success is not accidental: investors know that more and more consumers prefer to turn to these new players, who offer a wide assortment of innovative plug-and-play, multi-channel and easy-to-use banking solutions, including digital wallets, wealth management, peer-to-peer (P2P) lending and payment offerings. So much so that banks, even if they have traditionally been considered pioneers of process automation, risk to be in the background of today’s digitized, customer-driven financial services landscape.

The “unbundling” of banking by financial technology is forcing banks to rethink the future of their service delivery, in order to meet the expectations of consumers and get closer, somehow, to Fintech. Indeed, according to the Digital Finance Observatory of Milan Politecnico, 60% of all the Fintech start-up companies in the world provide banking services (lending, accounts, payments), while 19% are involved in investment, 5% in insurance and the remaining 16% in other services (marketing, big data, security, etc.). Not just that: in 2016, the Fintech start-ups that are active in banking received 73% of 26 billion total funding to the industry. Of this amount 60% is dedicated to Lending&financing (about 15 billion).

In short, the future of traditional banking – that plods along between increasingly tight margins and increasingly pressing capital requirements – involves technological finance. What has to change is the approach to customers, as well as the working of operational processes, that requires rethinking in a digital sense… otherwise banks risk to be kicked out of the market. Yes, because 95% of Fintech start-ups directly address consumers or companies – in both cases, the end users – developing alternative solution to traditional banking, while only 5% are working with banks.

However, banks should not despair: one in three start-ups has already started a partnership with a bank. Such partnerships have mutual benefits: for banks, the ability to innovate more rapidly by testing new solutions and investing limited amounts of money; for start-ups, the chance to use the physical network that institutions have as well as their large amounts of data. But will banks, that have always conducted end-to-end service delivery by integrating experience, processes and products, be able to adapt to this changing environment? In order to start such collaborations, banks must be willing to unlock their data and application services to partners as well as plug-and-play within new emerging platforms in which they are not the actual owners of the customer experience and relationship – which is a complete new mentality to banks.

One thing is for certain: if the convergence that is taking place between Fintech and banks were to continue, as we think, it would lead to a productive and positive sharing of technology, talent and know-how. So, banks and traditional financial services that will be able to take advantage of this opportunity and create partnerships with new players won’t succumb under the weight of innovation, rather, they will strongly benefit from it. They will be able to fill critical gaps in their portfolios, reach unserved audience segments, and provide customers with a better experience at  lower costs.