23 Sep Are banks the puppeteers of fintech startups?
This article originally appeared on bosbguide
Challenger Starling Bank’s first ever future of fintech report found that fintech startups are being controlled by the traditional players that have invested hundreds of millions of pounds into them. Survey results revealed that banks such as HSBC, Lloyds, Barclays in the UK and Spanish equivalents like Sabadell and BBVA are the biggest culprits and giant corporations have dominated 25% of fintech deals, approximately. Although the UK government is fully supportive of the fintech industry, with banks manipulating things behind the scenes, it questions whether or not customers are really the first priority.
Anne Boden, CEO of Starling Bank, highlighted that a lot needs to and has changed following the financial crisis. “Real disruption is more than a clever idea, it is about a change in mentality, a change in approach. In business, it is about breaking up business models, about making sure brand values are more than skin deep. Fintech had a clear purpose at its inception – putting the customer, not the product, first. But this report shows the revolution is still more bark than bite. If it is revolution rather than evolution that we want, if it’s the car rather than faster horses that we want to race, then 2017 is going to be a pivotal year for fintech,” Boden said.
The Starling Report, Revolution or evolution? said that fintech became mainstream as a direct result of the financial crisis. Many have argued that fintech came to fruition in 2014 after former Chancellor George Osborne formed Innovate Finance, the government trade body, and when challenger banks, like Starling Bank, started to take advantage of the relaxed regulatory framework. The report also stated that the rhetoric changed two years ago also, and people started to listen to new brands who had the ability to provide services that were cheaper, quicker and more digitally savvy.
Fintech is nascent no more
The so-called disruptors are on the rise and entrepreneurs are being rewarded with banking licenses. Alongside this, the number of fintech unicorns is increasing, but as we get closer and closer to 2017, the industry seems to be changing and transforming into something that may be beneficial for the big banks, rather than working against them. Starling Bank believe that “fintech has lost sight of its original purpose – to release the stranglehold of non-competitive banks over consumers. The question, therefore, is how to put real people back at the heart of fintech? Moreover, how does the current economic landscape help of hinder in that mission?”
The UK’’s recent decision to exit the European Union has resulted in global markets becoming volatile, but for most, London has retained confidence from investors, even if it has lost its EU membership. The report explored how this is the case because of the fast rate of smartphone adoption and venture capital funds in the finance and technology space continue to grow. However, analysts have predicted a slowdown in the UK economy next year with growth stabilising at a rate of 1.2% in 2017, down on the 1.5% rate this year, according to Moody’s.
“Billions have been invested in UK fintech during 2016 and the threat of Brexit appears not to have dampened finance accessibility for startups. Several new firms have closed funding rounds since the vote to leave the EU was announced in June, including Revolut who secured a £6.75 million investment from venture capitalists in London.” Despite this positivity, increasing competition is becoming harder because the legacy financial players are powering over the younger fintechs, as mentioned above. 80% of the fintech sector is made up of traditional fintech companies that support incumbent banks and institutions and this does not bode well for emergent startups and most importantly, the customer.
Collaboration is key according to the UK government, and this is why smaller fintechs are finding it difficult to flourish. “Collaboration plays perfectly into the hands of the UK’s biggest and oldest banks. And we have to ask: is this something we really want to do? Are we seeking revolution or evolution?” Alongside this, is the competition that we are seeing really competition at all? The report details how many are taking advantage of the opportunity where fintechs are “holding true to their fintech principles”, but are applying for legitimacy through a banking license.
Starling Bank sees a problem in this because of the way fintech is funded: investors only search for the most experienced entrepreneurs. As well as this, creating a customer-focused business in finance is difficult and there are many regulatory obstacles that a fintech would have to jump through. “This prevents the right sort of competition. In 2017 it is likely to remain difficult for truly independent entrepreneurs to get funded. The value of venture capital funding fell 12% in the second quarter of 2016 and despite a handful of new entrants the big banks know that the cards are stacked to their advantage in 2017.”
“But consider this: one in every three funding deals for fintech startups now (up from last year) are by interested corporates or legal partnerships. Moreover, the trend for more and more of this market to be owned and controlled by the big corporates (including the banks) means we getthe appearance of disruption while the same corporate entities embed their control on the marketplace,” the report stated. What is being highlighted here is that the image of the industry booming and acting as a viable contender for the traditional sector is false and that is because corporates and banks are those that control what the new fintech startups can offer.
The report uses Santander InnoVentures as an example, but Barclays, HSBC and Lloyds Banking Group have also entered the fintech sector in a similar way. “The desire of giant banking brands to achieve efficiency and cost-saving targets has fuelled the idea of a new era of partnership,” the important word here is idea. Another issue is that the big banks are constrained by old IT systems that are very expensive to renew and the simplest, and cheapest, way that these institutions are trying to solve this is by “collaborating” with fintech startups.
