The cold war thaws: Why fintech and banks are no longer mortal enemies

13 Apr 2018

Image: Lipskiy/Shutterstock

The idea that traditional powerhouse banks and innovative fintech start-ups are facing off against each other is an old one, and it’s time that changed.

The major powers of the financial worlds have been in place for centuries. However, the past decade and the advent of internet in the palms of our hands has shaken things up in such a way that if it were to happen to many other sectors, it would spell their demise.

After all, banking’s adoption of new technology had been relatively slow up until recently, with the customer’s experience still largely done either in person at a branch or through post, emails and making a telephone call.

As newer banks came into the fold offering the latest online and mobile services, it became clear that the older banks needed to do something, and fast.

What followed were a few years of what could be called a ‘cold war’ between established financial institutions and fintech start-ups.

However, in 2018, it is clear that this frostiness between the two has not only thawed, but has turned into what can only be described as a warm embrace.

Banks quickly learned that a new age was on the horizon, and it was a case that they could either adapt or die – but how exactly?

The obvious answer is to use their existing financial clout to simply buy up the competition.

Since 2012, the top 10 US banks have spent a total of $4.1bn in disclosed funding to purchase 81 different fintech start-ups, making it one of the busiest sectors for mergers and acquisitions around.

But not all efforts to keep up are so simple.

Outside-the-box thinking

Knowing that they needed a little outside-the-box thinking, many of the major banks have turned to setting up accelerator labs for start-ups, offering the former the chance to partner with some of the brightest minds in insurtech, regtech and others.

This, in turn, allows start-ups to avail of a space and partnership that can get its technology into the mainstream.

In May of last year, Barclays announced that it was doubling down on its commitment to new technologies with the opening of the largest fintech lab in Europe, based in London.

Called Rise, the centre – capable of housing more than 40 start-ups – is a collaborative space for Barclays to work with start-ups, developers and some of its other corporate clients on projects to “help to create the future of financial services”.

Meanwhile, Deutsche Bank opened its fourth innovation lab in the space of a year and there is also FinLab in New York, which was funded by JPMorgan to the tune of $30m.

Delving deeper into the figures, a detailed report published by PwC towards the end of last year showed that banks are not only interested in collaborating with start-ups, but are desperate to.

Of those surveyed, 88pc of the incumbent financial institutions said that they were afraid of losing revenue to the newcomers, but 82pc of banks said they planned to forge fintech partnerships in the coming years.

Playing catch-up is pointless

Speaking with, PwC’s director of digital and fintech, Ronan Fitzpatrick, said that in the space of just a few years, the banks have gotten much better at bringing partners into the business.

So, rather than going it alone and trying to follow the start-ups, they are trying to partner with them and find ways of passing on parts of their services to the innovators who have a fresh take on things.

“I think the big, big problem that the banks can have – or any heavily regulated organisation has – is that trying to keep up with regulation and then trying to be innovative at the same time is next to impossible,” Fitzpatrick said.

“You want to try and find a way to partner with someone who might be faster, more agile or have a fully formed or partly formed added value for your business.”

One of the most talked-about challenges for traditional banks has been the arrival of PSD2, a European law that came into force on 13 January this year. It means that banks will need to make customer data available in a secure manner, and eventually give third parties access to their customers’ accounts.

In a sense, the banks’ monopoly on customer data had lulled them into a false sense of security, but their actions of late with more partnerships and innovation labs have shown that they are in no mood to lose.

As my colleague John Kennedy so succinctly put it: “If they embrace the storm, they will do fine. If they hide from it, they will be devoured.”

A similar view is held by Fitzpatrick at PwC: “On one hand [PSD2 is] a threat for the banks, but on the other it’s a great opportunity for them to up their game and actually see how they can be as good as any of the start-ups that have emerged.”

A start-up’s view

One start-up at the coalface of this collaboration is ID-Pal, a KYC and ID verification business that has worked closely with Bank of Ireland to get its solutions engaged with one of the country’s biggest banks.

James O’Toole, the company’s CEO, is of the opinion that PSD2 will guarantee the need for a symbiotic relationship between banks and fintechs.

“[Its implementation] is perhaps why we’ve been getting the traction we have been from banks and the payments industry most recently,” he said. “Without a doubt, PSD2 will make partnerships more essential than ever in order to succeed.”

Perhaps the most obvious sign that the ‘us versus them’ mentality is fading, however, is the fact that banks are even coming to terms with the idea that their brands might one day not be as familiar as they were before, instead happy to have their partners or recent acquisitions act as the shop front to their various services.

There is clearly lots of space out there for both the banks and the start-ups to play in, and the old-fashioned fear of splashing in someone else’s puddle is dead in the water.

Colm Gorey was a senior journalist with Silicon Republic