22
Sep 2016

FINTECH AND BANKS – FRIENDS OR ENEMIES?

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Do banks need to fear Fintech companies? While there might be a number of reasons why banks approach fintech with a certain skepticism and maybe even alarm, we need to ask ourselves: are these concerns justified?

In the past, banks have invested large sums into proprietary systems in order to make fully customized banking solutions available to their customers. These systems are customized to the point that each dashboard looks different, password and login procedures differ and users need various tokens and release keys. This results in a veritable digital cacophony of access points and processes for payments.

Fintech companies, on the other hand, have developed platforms that integrate non-harmonized access points, technologies and processes worldwide, stripping them of their complexity for corporates. By using these technologies, businesses can become independent of banks, remain mobile and flexible and react quickly when it comes to changing banking connections. Some banks view this trend with concern. They fear getting replaced as they can no longer ensure customer loyalty by means of proprietary tools.

However, whether or not these fintech fears are actually justified really depends on a bank’s business model. Has a financial institute developed a strategy to face the fundamental changes currently happening in the financial industry? Equally important is the question of whether you’re dealing with the requirements of end users who would like to make fast payments online or with their smartphone, or if we’re looking at corporate clients for whom compliance and security are the driving factors behind payment processes.

Fintech Companies vs. Banks – A matter of risk

At BELLIN we deal exclusively with the complex requirements of globally active corporations. In the last few years, these businesses have had to experience that banks are no longer always the pillars of strength they used to be. In Germany alone, a number of banks have ceased to exist for various reasons, including Dresdner Bank, WestLB or recently WGZ. On a global level, we’ve witnessed HSBC Brazil or RBS completely discontinuing international cash management from one day to the next.

Since 2008, in stark contrast to previous years, we tend to see banks representing a risk factor for businesses when it comes to investments or process reliability, rather than the other way round. This has meant that businesses were forced to become more independent from their lenders and have since consciously continued down this path. They have learned that they need to be able to act quickly if a bank falters completely or at least becomes unavailable in a certain region for some time. This trend is not only true for refinancing but – and this brings us back to fintech – also for the digital management of banking transactions.

Casting our minds further back, we could be reminded of the time when cash pools were first established:  some banks looked at them with horror, considering them margin-killing instruments from hell; others viewed them as a banking tool of the future and were all proactive. In many cases, it was this proactive approach that made the difference when beating the more conservative competition. Banks who ended up pursuing this type of service long term have come out this phase of change stronger. The same can be applied to the cooperation of banks and fintech companies today. Banks kept viewing fintech companies as competition until they were left with no other option than to acknowledge them. The choice is: love it or leave it. More and more banks have started opting for the first.

Financial Technology – a friend for banks?

Delving deeper into the topic, many banks have realized that their own business would benefit immensely from working closely with fintech companies – in particular when it comes to aspects that benefit their customers. By partnering with fintech companies, banks no longer need to bother with providing applications for the more complex corporate clients. This translates to an enormous cost reduction when it comes to software development and warranties when providing the application. The bank can leave all this to a neutral third party. They can now offer their corporate clients the application developed and marketed by the bank’s fintech partner of choice. This is a win-win situation for both: fintech companies gain access to a customer group that would normally only be accessible by spending a lot of money – money they would not be able to charge their customers, making it an unprofitable business model. Software development comes with fixed costs, meaning the price for using an application depends on the number of users: the more users, the lower the price per customer. Banks have large customer portfolios that fintech companies can tap in order to increase their own customer base, in turn reducing the price users have to pay for their products considerably.

A bank-fintech partnership can also help enhance bank-specific functionalities that could not be provided as part of a standard offering. This represents another incentive why customers should opt for precisely this bank-fintech combination, ultimately benefiting everyone.

To conclude:

  • Banks reduce costs by doing away with expensive, proprietary software development while staying ahead of the game with their offering.
  • Fintech companies have lower selling expenses, in turn lowering the cost per customer and achieving enormous economies of scale; they also gain access to customer groups that would normally be unachievable for them.
  • Businesses are the real winner in this scenario; they benefit from an integrated, collaborative solution that meets their needs. The bank can concentrate on what it does best – “banking” – while fintech companies make solutions affordable for businesses that would otherwise be unachievable. With both parties involved saving money, the combined strength of bank and fintech also creates potential for more efficiency on behalf of the company. The ultimate objective of becoming bank-independent is met, and this with the support of a confident and strong bank.

Banks that still see their future in the development of proprietary software platforms for corporate clients can be compared to those banks who fought the introduction of cash pooling a few years back. Being convinced customer loyalty meant “binding” customers to their own software, they missed backing what really counts: what the customer actually wants. Sooner or later these banks are going to come to their senses. Alternatively, they will one day join the list of banks that have simply disappeared. For banks like that fintech is indeed the enemy. But this article shows that a very different future is possible.

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