Fintech and banks: competing through collaboration
There’s little novel about fintech and established financial institutions working hand-in-hand. Behind the snappy ad campaigns, sans serif fonts and slick app interfaces, most fintechs have always relied on some form of partner license, or access to a bank’s network.
Even challenger banks - the recent wave of financial organisations that straddle the line between all-digital and legacy banking - never really sought to ‘challenge’ either side of the coin in the common sense. Instead they offer banking that retains much of the form customers expect of a traditional bank, while offering the latest fintech services for digital payments, credit access and personal finance.
The past decade of Facebook founder Mark Zuckerberg’s ‘move fast and break things’ mantra may be coming to an end, supplanted by what Greg Satell, writing for Harvard Business Review, calls a new era of “mass collaboration, often involving direct competitors”.
To survive and grow, businesses are turning to industry leaders beyond their own sphere to quickly pivot and serve their customers’ ever-changing needs. For many fintech firms, this will be business as usual; collaboration is in their DNA. Fintechs routinely partner, after all, in an increasingly interconnected ecosystem to bolster capabilities and deliver customers tailored services.
But now, pioneering fintech startups and established banks are on the brink of a fresh, collaborative drive towards delivering modern solutions for business funding, personal finance and meeting the needs of a growing number of customers who seek alternate ways to access their money under COVID-19.
Collaboration as competition
Georgy Sokolov, co-founder of crypto digital payments platform Wirex, says “creating a bridge between the traditional financial infrastructure and the new digital one” was always core to the firm’s vision.
This is a tenet often repeated by fintechs, whose founders established startups to fill a niche in the finance industry they themselves encountered, or leverage technology to solve a problem that traditional finance simply cannot.
Partnerships between established banks and fintechs yield immediate advantages to both sides: banks gain the agility and innovation of fintechs, while offering decades of customer loyalty, scale and established networks in return.
“It’s a delicate balance,” says Aleksander Leicht, Head of Banking Alliances, Elavon Merchant Services, Europe. While increasingly open to partnering with fintechs, banks also often act as stewards for their customers: “They serve as both a gateway to connect the merchant to the best solutions available, but also as a gatekeeper to safeguard their customers.”
Looking to Interbrand’s Best Global Brands Ranking 2020, major financial institutes co nstitute 12 of the top 75 brands, including J.P. Morgan (22), Goldman Sachs (49), and Morgan Stanley (69). Their standing alongside household names like Apple, Disney and BMW, speaks volumes about the role recognisable brands play when people decide how and where their finances are managed.
Put another way: “You cannot expect people to switch away from the banks they have trusted for generations to something completely new,” says Sokolov. He argues that while consumers may be happy to swap their DVDs for Netflix, or hail an app through Uber rather than their local taxi service, when it comes to banking “it’s money, it's serious, it's conservative”.
Wirex has benefitted from both sides of the partnership. The fintech’s services allow users to manage all their funds in one place, whether that’s fiat currency such as GBP or EUR, or virtual coins like Bitcoin or Ethereum.
“The IBANs that Wirex users get are provided by LHV, the largest and most dynamic bank in Estonia, via a seamless integration with their API,” Sokolov explains. “On the other hand, we have a great and developing partnership with Maker Foundation, the organisation behind the DAI stablecoin, where we bring our users the benefits of the nascent decentralised finance (DeFi) industry by bridging it with the traditional one.”
Partnerships for tomorrow
Prioritising resources for digital agility has never been higher on the agenda for banks, as the entire finance system further fractures and decentralises. But rather than allying to fulfil a singular need, the most valuable and sought-after partnerships are those that offer a continued path of innovation and support - a symbiotic relationship between the foundations of global finance, and the nimble fintechs driving the sector towards the digital future.
At Stripe, Ellen Moeller, Head of Partnerships EMEA, says banks offer the “tools and rails” to infrastructure and the products the fintech builds for its customers. “Ultimately, it is this network of partnerships with banks, card networks, and payment methods around the world that makes Stripe an access point for new fintechs wanting to build products on top of existing financial services infrastructure.”
Banks are seeking partners “for tomorrow” as much as the immediate demands of today, says Leicht: “Contracts signed previously for three to five years are now extended to five to seven years.” Financial institutions are also seeking more up-front investment from their partners, a greater buy-in to form a “more concrete value proposition for merchants”, Leicht says.
Clearing regulation hurdles
Data privacy and the use of personal digital information for profit are growing concerns in all sectors, particularly finance where fraud and criminal activity are prevalent. Digital finance is already highly regulated, and this throws up issues for many fintech startups trying to go it alone, particularly the burgeoning cryptocurrency field where the introduction of a new digital token via an initial coin offering (ICO) is the crucial first step, and often the most difficult.
“If some shady ICO project comes to us asking to support their token, linking it to our Wirex cards, the answer would be ‘no’," says Sokolov, regardless of how strong the business case. He argues that while Wirex performs heavy due diligence checks, the rapid expansion of the industry, coupled with growing attention from regulators, make this the “only viable approach in the long term”.
Partnering with established financial institutions, who have developed airtight anti-money laundering (AML) policies and possess decades of security expertise, mitigates many of these issues. Moeller sees “close collaboration between industry players” as vital for fintech firms in “maintaining the integrity of the online financial ecosystem”. Here, fintechs are free to push the boundaries and iterate while remaining insulated within an organisation well versed in regulatory best practice.
The takeaway is that regulation doesn’t stymie fintech innovation. In fact, Leicht says it is opening more doors than ever for innovators: “Regulation is also driving change. PSD2 (Second Payments Directive) and Open Banking are now encouraging competition amongst the traditional players and creating opportunities for innovation.”
Integrating more fully pays off, says Marieke Flament, CEO of Mettle, a digital-only business account platform backed by NatWest. She describes Mettle’s position not as a partner, but as an “innovation test bed” within the group.
“It means we have the best of both worlds. It can be hard for a large traditional banking institution to roll out new cool features every week or month. But it is also very hard and expensive for the bold and agile fintechs to navigate the complex and ever changing regulatory landscape… Everyone should be doing what they are best at.”
The COVID effect
The global pandemic has uprooted every industry to some degree. The solution for many is leveraging technology to reach customers who are operating businesses remotely, living in lockdown or looking to replace the companies in their lives that have gone under. In many sectors, necessity has spawned a rapid move towards digitisation.
Whether COVID-19 has had a similar impact on the fintech space isn’t quite so clear. Leicht has witnessed greater interest from banking institutions looking to form partnerships with payment companies. He sees this as a reflection of the ongoing upheaval in retail and merchant expectations, “but also correlates to COVID-19” and how the pandemic has accelerated the shift towards digital commerce.
Meanwhile from Sokolov’s perspective, little has changed: “I can’t really speak for banks, but for us there hasn’t been much change… We have always been collaborating with banks, rather than competing.”
Moeller agrees: “I don’t see it this way. Financial services has always been an ecosystem that relies on partnerships.”