16 Oct Fintech start-ups and banks, potentially a win-win relationship
New fintech companies are born every day, and can offer many services more efficiently than banks. How should banks respond?
By Jeroen de Bel, Independent Consultant, Olympus Advisory Services
Fintech is gaining ever more traction, with new fintech start-ups being born every day. These start-ups typically offer innovative solutions in areas such as mobile payments, peer-to-peer lending and blockchain, but also in areas such as back-office operations and financing.
Currently there are around 10,000 fintech companies worldwide, and total worldwide investment in fintech is estimated to be USD 30 billion in 2017.
This ongoing rise of fintech start-ups raises the question of how banks should respond. Should they cooperate, compete or even ignore these start-ups?
In general, banks have shifted towards welcoming innovation and cooperating with start-ups. Most banks now have large incubator programs, and they increasingly invest in start-ups.
For example, BBVA have made considerable investment in non-bank service providers, such as their acquisition of Simple (formerly BankSimple) and Holvi. They also boast a large in-house innovation department that acts like a fintech start-up.
However, banks’ enthusiasm towards fintech start-ups tends to fade away when they start to face real competition from them. Take the Dutch mortgage market, for example. Within a few years, new entrants such as Munt gained a combined market share of close to 10% by offering lower interest rates and a better customer experience (e.g. by offering much quicker turnaround times).
It is important to understand the position of banks compared with start-ups. Most banks offer a large variety of products, service many market segments, and cover the full value chain. For example, a bank may service retail, high-net worth and corporate clients; offer a full range of banking and insurance services; may be active in multiple countries, and operate all activities from financing, to IT, back-office and distribution.
In contrast, fintech start-ups typically target one specific niche, often one that is yet underserved or overpriced. Start-ups are better positioned than banks to service these specific niches, as they can offer a better customer experience and a more efficient operating model.
One interesting example is Transferwise, which offers foreign currency exchange at a lower price and faster speed than a high street bank. Another is Stripe, which offers low-cost payment solutions to SMEs. A third is N26, which offers retail payment accounts tailored to mobile banking.
Individual start-ups typically have little impact on banks, but many start-ups has profound effects on the market. Collectively, start-ups are slowly unbundling banks’ value chains. As a result, banks face increasing competition in many parts of their business models. Potential loss of market share, additional required investments and lower prices all add up to lower profits for banks. To respond, banks should raise the bar, offer better services (e.g. quicker, easier) and set lower prices.
At the same time, the rise of fintech start-ups offers banks new opportunities. As start-ups typically target one specific niche and part of the value chain, they are likely to be more efficient than banks in their niche. Partnering with start-ups could help improve banks’ services and lower their costs. While banks pay a fee to the start-ups, this is typically lower than their internal cost savings.
How, then, should banks respond to the rise of fintech start-ups? They should embrace the new reality. Thanks to start-ups, new markets are created and customers expect a better service and lower prices. Banks should continue their efforts at streamlining their organisation to be more efficient and customer-friendly. They should also acknowledge that their monopoly over retail banking is a thing of the past, and that they must adapt to competition from both new and incumbent players.
In addition, banks should make an active choice as to where to compete and when to partner with start-ups. Banks should ask themselves: What are our core products? Where are we best positioned to deploy our competitive advantage? (e.g. large customer base, distribution network, risk management, regulatory compliance, etc.)
For example, a bank could maintain its physical distribution network of financial advisors but outsource the back-office processing (e.g. to Stater, Quion, or Unisys), or focus on investments and lending while outsourcing savings accounts (e.g. to Raisin or Savedo).
If banks focus on strengthening their core products and activities while partnering with fintech start-ups for their non-core activities, banks could significantly improve their customer proposition and competitive edge.
At the same time, many start-ups are also seeking cooperation with banks to gain access to a large customer base and obtain sufficient scale. Partnerships between banks and fintech start-ups therefore can really be a win-win relationship.
Jeroen de Bel is the founder of Olympus Advisory Services, a management consulting firm specialized in the financial services sector. He helps his clients with insights, market research and strategy consulting, tailored to client needs and situation. Jeroen has in-depth knowledge of both the traditional banking sector and new innovative players in the market. He is well positioned to help bridge the gap between the incumbents and new entrants.
