Banks And Fintech: From Foes to Friends?

Banks And Fintech: From Foes to Friends?

Banks And Fintech: From Foes to Friends?

Charles Keenan

Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people's living rooms thanks to the relaxation of surcharging rules.

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When it comes to fintech, it wasn't too long ago that startups were seen as mainly an existential threat. Remember when Jamie Dimon, the chief executive of JPMorgan Chase & Co., told investors in 2014 that Silicon Valley wanted to eat banks' lunch?

Yet now, many financial institutions, facing customer losses to fintech, are looking at the sector as an opportunity, buying startups, striking licensing deals and setting up innovation incubators — meaning an improved customer-service experience industry-wide.

"We are sitting down to have lunch together much more than they are out to eat our lunch," says Gabriel Woo, vice president of innovation for Royal Bank of Canada (RBC) in Toronto.

Challenges remain for banks

By no means have banks solved the threat of fintech, as they continue to lose customers to those providing better services. About 63 percent of customers are now using fintech products or services, according to a survey of 16,000 people worldwide by Capgemini and the European Financial Management Association. About 55 percent said they are more likely to refer friends and family to their fintech provider, compared with 38 percent citing their bank.

Startups are empowered by lower barriers to entry, thanks in part to the internet and inexpensive cloud computing, and they have an enthusiastic investor base in Silicon Valley and beyond. Meanwhile, technology advancement in general has raised the bar of performance consumers expect.

"With all of the things that have become possible through mobile technology, clients' expectations on how they want to be served are now being shaped by a lot of other experiences they are having outside of financial services," Woo says.

A new reality for banks

Yet in a sense, many financial institutions have woken up to the new reality. Banks were preoccupied post-financial crisis with risk management and regulatory compliance, but now they have been turning attention to fintech, notes Christine Barry, research director for the wholesale banking practice at Aite Group, a Boston-based consulting firm.

"Banks have adjusted to operating in a new normal," Barry says. "Initiatives to address new customer demands are now front and center, as are user experience, speed and automation."

Barry predicts this trend will help shape wholesale banking and payments for the better, including the speeding up of payments, deployment of open APIs, exploration of blockchain scenarios, automation of onboarding and modernization of lending.

Licensing deals

These days, banks are forging partnerships constantly. In lending, JPMorgan struck a deal with OnDeck Capital, which does small business loans, helping the bank reduce funding time to one day, down from a month. Bank of Nova Scotia, ING and Grupo Santander have invested in Kabbage, another small business lender. In cross-border payments, 12 of the world's top-50 banks have worked with Ripple, a blockchain developer, to help speed up transaction time. R3 CEV is a consortium of 50 leading financial institutions worldwide to explore distributed ledger uses.

In retail, Moven, a mobile banking app, now licenses its products to financial institutions. TD Bank Group in Canada used Moven’s technology to launch in April its TD MySpend app, which helps users track spending and manage money, offering features similar to Moven’s app. By mid-June, 350,000 users had signed up, whereas conservative projections initially looked to have 300,000 by the first quarter of 2017, says Brett King, chief executive officer of New York-based Movencorp.

These kinds of successes also underscore how it can be much less costly for a bank to license fintech software. King estimates it would have cost TD Bank 15 to 20 times more to build the app itself. Moven deployed the initial prototype in four months in March, whereas it could have taken 2.5 years to develop it internally, he says.

"The reality is going to be that no bank will be able to do it as cost efficiently and as quickly as they could if partnering with a fintech," King says.

Mining for talent

The key for banks, experts agree, is to be more nimble when dealing with startups.

"It requires a bank to be open to a different way of working," King says. "Procurement departments and the like are very effective at killing fintechs. Get procurement out of the way."

To develop successful partnerships, RBC has set up its own streamlined onboarding process geared toward startups, bringing together procurement, legal, risk management and the business units. For example, if RBC is interested in working with a fintech company, it can execute a non-disclosure agreement within 48 hours, compared with one to two weeks previously, lining up the right people to sign the document.

"Those [former] processes don't lend themselves well with four-person startup companies," Woo says.

Banks also need to network, and many have set up incubators to nurture startups. RBC, for example, in June, announced the launch of an innovation lab in San Francisco, adding to the hubs it has in Toronto, London, Luxembourg, New York and Orlando.

Meanwhile, banks must also choose carefully. "It requires a lot of due diligence," Barry says. "Not all of these players are going to be around in a few years, so you have to make sure you have the right partner."

Yet despite all of the disruption so far, financial institutions still have leverage given their regulatory know-how and expertise in how small business customers still prefer to work with their banks, Barry adds. "Most would prefer to go to their bank as opposed to a third party because they trust that the bank has the necessary security in place," she says.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

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Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people’s living rooms thanks to the relaxation of surcharging rules.

His work at the American Banker included writing about credit and debit cards, merchant processing, and bank stocks. He later freelanced for the Banker and industry publications such as Banking Strategies, Bank Director, Community Banker, and U.S. Banker. He also writes about investing, insurance and health care, and is based in Los Angeles.

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