A SPECIAL RELATIONSHIP
The FinTech revolution’s narrative has changed over the past few months. What was once mooted as an all-out war between incumbent banks and FinTechs is morphing into a story of symbiosis and reciprocity that will unlock value across the ecosystem. A recent article by Sam Maule in Bank Innovation likened the changing dynamic between banks and FinTechs to the relationship between the United States and Great Britain that evolved after the American Revolution into what became known as the special relationship, characterized by unparalleled cooperation on economic and military matters.
There is a strong case for collaboration between banks and FinTechs. Banks bring vast existing customer bases, regulatory certainty and data security and FinTechs bring innovativeness and flexibility to create superior user interfaces, product simplicity and seamless integration. The case for collaboration and the emergence of a special relationship is supported by a growing body of empirical evidence. Total FinTech investment in 2016 is expected to surpass the $14.6bn raised in 2015 and banks, led by Goldman Sachs, Santander, JP Morgan and Citi Group, are expected to expand their share of the total. Furthermore, a recent survey by Business Insider showed that only 25% of banks worldwide perceived FinTechs as a threat that they compete against directly. A far greater proportion of banks surveyed saw synergistic potential, with 34% viewing FinTechs as possible collaborators and 25% seeing FinTechs as possible acquisition targets (25%).
MOST BANKS HAPPY TO PARTNER WITH MARKETPLACE LENDERS FOR NOW
The growing number of partnerships between banks and marketplace lenders is a great example of bank-FinTech collaboration. Peer-to-peer lending has become a misnomer. The preferred term, marketplace lending describes a lending ecosystem where institutions (including banks) take up 80% of the loans. In spite of the general bank support of marketplace lending, some believe that the marketplace lenders could turn on the institutions that supported them.
Even though the flows through marketplace lending platforms and crowdfunding platforms are dwarfed by the flows through traditional bank and financial institution channels, the threat that FinTechs pose to banks is very real. Goldman Sachs has estimated that 7% of bank profits or +$11bn could be at risk of non-bank disintermediation. This explains why some banks, like Goldman Sachs and Wells Fargo, have opted to build their own marketplace lender, while others may, in time, acquire a marketplace lender outright.
REGULATORS COULD DECIDE WHO WINS
The adversarial approach from banks may yet become justified. Adopting the view that banks and FinTechs will abandon all hostile intent in favour of cooperation could be premature and naïve in light of the latest changes in regulation. The Revised Payment Service Directive (PSD2) is expected to alter the landscape dramatically and demonstrates the profound influence that regulators can have on the power struggle between banks and FinTechs.
In the PSD2 compliant world banks are compelled to provide third-party providers access to customers’ accounts through open APIs. Effectively, this will enable FinTechs to build on top of banks’ data and infrastructure. Are banks facing the risk of becoming “dumb pipes” in the same way as mobile network operators with over-the-top (OTT) services layered on top? More to come on this in my next blog.
by David Krawitz
