Banks are increasingly pitted against fintechs and their digital counterparts. At conferences delegates are asked to group into incumbents and challengers, and the media have feasted on the David versus Goliath image too. But does that narrative of opposition hold true in reality?
The figures give an unequivocal answer to this. According to KPMG, fintechs globally pocketed a record $57.9 billion in the first half of 2018, the bulk of it coming from incumbents. Examples of successful cooperation are abundant. Blockchain fintech R3 recently received over $100 million from financial behemoths in yet another funding round, while JPMorgan pumped money into restaurant payments startup LevelUp.
But what about the other side – surely it must be the goal of fintechs to disrupt the finance industry, for which they need to be independent? Not quite. A survey among fintech decision makers querying them about their major corporate goal revealed that three out of four strive for cooperation with established institutions. Looking to their role models, this comes as no surprise. Even PayPal, the fintechs’ poster child, relies on a wide bank partnership network. It simply adds a layer on top of the existing financial system.
The tricky relationship
Digital banks or neo-banks are a particular type of fintech – namely one with a banking license. This means they not only facilitate payments, but also hold their customers’ money. In this sense, unlike many other fintechs that are merely technology providers, digital banks are competitors.
Upon first glance, there is not much possibility to partner with traditional banks as both groups are vying for the same customer groups. The most famous examples – N26, Monzo or Revolut – are classic opponents, usually providing the same basic services with a no-frills approach. Berlin-based N26 is the best example. The mobile bank offers an account and a Mastercard for free, which usually covers the needs of the average consumer. The customer experience is clean and completely branchless, an account can be set up in eight minutes using nothing more than a smartphone and a selfie to fulfill the KYC-requirements. A premium version of the card insures paying customers, yet one reason why neo-banks can offer basic services at a zero-pricing is their focus on a few core products. This leaves plenty of room for partnerships. N26 does not offer its own loan product, for example, but partners with the fintech auxmoney. As it moves to expand its product portfolio, partnering with incumbent banks is also likely.
Cooperating with competitors is not something that has been introduced with the advent of digital banking. Under the label “co-opetition”, banks and financial technology companies have been partnering for decades. The longer value chains have gotten, the more specialisation has occurred, allowing financial companies to build unmatched scale and hard-coded collaboration into the banking sector’s character.
Aside from selling products to each other or using joint sales channels, cooperation largely happens through investments. Consider this: The world’s five largest direct banks are all either arms of or affiliated with a traditional bank, and among the top 20, 15 are. It doesn’t always have to be that extreme. Often fintechs are funded only partly by incumbents.
To drive or end co-opetition?
Looking at financial history, one rule can be discerned – with each technological advancement, banking systems get more complex, need a higher level of specialisation and expertise, and eventually end up making the value chain longer. Today banking is at the verge of no less than three transformational technologies: cloud computing, artificial intelligence, and blockchain. No company can be expected to be leading in all of them, so technological advances enforce collaboration. Yet, blockchain stands out among the three. It can circumvent the entire payments system that was built layer-by-layer over the last decade. I can send value without banks, processors, or credit card companies being involved. So, from a technical vantage point, it holds the key to ending co-opetition, but the workings of the market are more complex than that, especially when they rely on network effects, as is the case with payments.
From academic research we know that every innovation passes three phases – fluid, transitional, and specific. Each of these phases requires a company to have different strengths to be successful. In the fluid phase everybody is looking for the right use case and the killer application. Agile companies that are quick and effective in product design are the champions at this stage. It is all about doing the right thing. In the transitional phase companies then also need to look at doing things right. Product features and cost structures are fine-tuned, before they are industrialised and scaled in the ultimate specific phase.
This model of innovation dynamics initially favours small and flexible fintechs, before the strengths of big banks become the major arbiter of success. You need both. It is crucial to be the first to have in place the right product for the right customers. But it is equally important to have the necessary funding, operational resources to absorb skyrocketing demand, and a strong brand recognition and customer base. Don’t forget that technologies such as blockchain heave banking into the digital age. Thus, all mechanisms of the digital era apply, including the winner-takes-all principle. While technology enables fintechs to bypass the current system, from a business perspective cooperation between incumbents and challengers has never been as needed as it is today. You can be sure that despite blockchain’s ground-breaking setup, we will still see enough of it.
About the expert
Igor Pejic is the Head of Marketing at BNP Paribas PF AT, part of Europe’s largest banking group. Previously a business journalist, he regularly comments on payments, transactions and blockchain in the media. He was voted by McKinsey and the Financial Times as one of three finalists in the Bracken Bower Prize for his work on blockchain in 2019, which resulted in the publication of his book Blockchain Babel on March 3, 2019.