Time flies, doesn't it? In the banking world it certainly does, and we regularly are pinching ourselves when we realize that we are well into the second decade of FinTech as a market. What started off as relatively independent technology firms doing bankers' work better than the bankers themselves, turned into a powerhouse of alternative solution providers to people's financial needs.
“Talent wins games, but teamwork and intelligence win championships." Michael Jordan, Basketball Champion
Whereas the incumbents were typically slowed down by legacy technology systems, the FinTechs were more nimble and reactive. And then some bankers remembered that if you can't beat 'em, then buy 'em. And some stuff in between, and here we are today. In this week's edition we explore how to measure the success of partnerships in the FinTech space. Enjoy!.
The approaches used by banks are often multidimensional and incorporate more than one strategic approach, as show in the graphic below. Several leading banks across the globe are actively investing in fintech either through venture capital funds or directly into the equities of selected fintech companies (see more, Where do banks invest in FinTech?)
Bank FinTech engagement strategies
Some incumbents have taken measures as accelerator programmes and incubators towards investing in development of promising fintech companies and building industry engagement. Many other banks seek to identify the right fintech with emerging technology innovations as partner for specific projects according to their operational and business requirements. The ecosystem is evolving as industry witnesses increased collaboration leveraging API technologies as they open their systems to facilitate faster integration with new solutions.
Partnerships are supposed to work, but they do not always do so. Whether it's a dominant partner or a market miscalculation, not everything goes to plan, but sometimes they do. How to assess this for FinTechs and banks, if we trace back the relationships they have had over the last fifteen or so years? It depends which way we look at it.
One criterion is the adoption of FinTech, which consultancy firm E&Y develops in depth, having interviewed more than 27,000 customers in 27 markets. We certainly agree with their observation that the pace of innovation continues to accelerate, becoming the “new normal” within financial services.
Clearly, FinTech is seen everywhere: growing and globalizing, entering the mainstream in all markets studied by EY and leveraged by the current pandemic. Emerging markets are leading the way: in both China and India, the adoption rate is 87%. Close behind are Russia and South Africa, both with 82% adoption. Among developed countries, the Netherlands, the UK and Ireland lead in adoption, reflecting in part the development of open banking in Europe.
We can also think about how well the incumbents, banks, are served by FinTechs. Clearbank has surveyed 100 independent firms. Collaboration being the new competition and banking-as-a-service being the new normal are certainly what we are seeing.
Sometimes this collaboration is highly visible - banks directly backing fintechs or a fintech’s service being offered by a bank. Sometimes the collaboration is less visible - banks using a fintech service like KYC in the back-end or a fintech offering deposit protected accounts through a bank. The reality is that - to a greater or lesser degree - every fintech needs to work with a bank from safeguarding services through to access to accounts and multiple payment rails. And the nature of this relationship is coming to define the industry.
According to Clearbank research across five leading FinTech markets in Europe, FinTechs see their choice of banking partner as critical to success but too many believe they are misunderstood, underserved and that their current bank is increasingly inhibiting their business as well as the potential of the wider fintech market.
FinTechs of all sizes want to improvement their banking partner relationship. At the core is the desire for FinTechs to be more independent and not have to compete for market share with the banks that are their partners. FinTechs are looking for a partner rather than a supplier. And they want these partners to be tech-driven. This means offering APIs, Open Banking support and being cloud native as standard.
How challengers, incumbents and players from outside the financial industry interact to form FinTech ecosystems that are replacing traditional bilateral partnerships, is another way of looking at the question. Elias Ghanem at Capgemini has a few words to say about this, and we think his graphic sums the ecosystem up very well.
Bank FinTech Collaboration
A good way to see it is the approach that BBVA has taking to deal with disruption. Few years back they pledge to be a technology company rather that a banking institution.
BBVA has built a financial ecosystem into its business that is really paying off. From one side has built a set of innovative start ups and also has invested and acquired challenging brands. While actively partnering with big technology and traditional companies to go ahead of the competition. However, the current economic environment has lead to BBVA to closing down or selling some of its eraliest FinTech acquisitions.
For other specific examples of which partnerships are working, you might want to check out the movers and shakers according to Flybits.
Finally, we think it is always fun to use the benefit of hindsight to see how the future turned out in the end. No better year than 2020 for this, have a read of William Morales' prediction of how partnerships would work and 5 Bank and FinTech partnership ideas to generate revenue from Ron Shevlin.