When FinTechs Compete, Banks Can Also Win
It’s not exactly dogs and cats living together in harmony, but FinTechs and banks — the upstarts and the traditionalists — are certainly cozying up, a trend that looks certain to continue.
Take the latest example: Ant Financial Services Group on Wednesday (May 23) announced it would partner with China Everbright Bank and its FinTech subsidiary to “facilitate China Everbright Bank’s digital transformation,” Ant said in a press release.
“Ant Financial will share its financial-grade technological capabilities and knowhow with China Everbright Bank to help it develop private and hybrid cloud platforms, scalable open financial architecture, internet finance architecture and mobile architecture, as well as AI-driven applications, smart risk management systems and financial-grade biometric verification,” the statement said.
The deal is newsworthy because the mainstream view still sees banks and FinTechs as adversaries, each competing for payment and financial services revenue. “Disruptive FinTech startups not long ago were thought to threaten important revenue streams of even the biggest financial institutions,” reads a report released in late April by the Wharton School of the University of Pennsylvania. “But they are now pursuing business models based on collaboration with banks or even being acquired by them.”
Examples of that collaboration, according to the report, include India-based ICICI Bank launching a digital micro-credit offering with Paytm; China-based Bank of Communications teaming up with FDT-AI to “develop intelligent, personalized investment research based on bank clients’ past transactions;” and Scotiabank and others working with U.S.-based Kabbage on business loans.
“These moves by financial institutions and FinTechs just [shows] how globally the imagined natural differences between traditional financial institutions and creative, disruptive FinTechs continue to shift from competition to collaboration,” the Wharton report said.
Among the fuel for this shift is PSD2, the European banking rule designed to free up data and access (with consumer approval, of course) across standardized formats and processes — which, in turn, could make it easier for smaller companies, for FinTech, to play harder on the field dominated by major financial institutions.
One big way to more revenue revolves around harnessing the power of APIs.
An example of that motivation came in late May when HPS, which sells payments software, announced the launch of an API designed to help FinTech innovators integrate into banking systems. Specifically, the HPS PowerCARD Connect-Open API could enable FinTech developers to integrate mobile payment, tokenization, biometrics and other emerging banking technologies into their own solutions. Morocco-based HPS hopes to ride the energy of PSD2 to expand in Europe with its technology.
Such moves appear likely to continue, further tying together FinTech firms and banks. ACI Worldwide and Ovum recently released a report that said financial institutions are increasingly acknowledging the value in API technology, with 92 percent of European banks having a strategy to further develop APIs, followed by 86 percent of banks in Asia.
Still, a cautious attitude about FinTech remains in some quarters.
JPMorgan CEO Jamie Dimon famously warned about the threat to traditional banking posed by FinTech, though his tone has seemed to ease in recent years. As well, he also bought WePay as an example of making investments in FinTech, and is collaborating with OnDeck on the bank’s digital small business lending product, Chase Business Quick Capital.
Regulators, meanwhile, are either offering their encouragement or setting the stakes for banks that fail to recognize the opportunities leading to more FinTech activity.
Late last year, Joseph Otting, the U.S. Comptroller of the Currency, said that “banks have to offer customers easier access to lending and other critical services through mobile applications and websites to prevent losing ground to financial technology companies,” according to a summary in The Hill of his first press briefing with reporters. “Otting said that FinTech could play a limited role in the broader financial services industry with proper federal oversight,” continued the report.
Otting’s predecessor, Thomas Curry, had talked about a banking charter for FinTechs that would save them the trouble of meeting bureaucratic requirements state-by-state. “Otting said he was open to the idea,” The Hill reported.
Others put the FinTech-and-bank issue in far starker terms. “Incumbents that don’t seek to partner will die,” said Mike Sigal, co-founder of consulting firm Upside Partners, in the Wharton report. “Smart incumbents realize that they can benefit from the insights and agility of startups, while startups have understood that the scale, reach, stability and regulatory management of incumbents can be helpful.”