“Banks could fall into irrelevance if they fail to keep up with the pace of rapidly developing FinTech technologies.”
– Antony Jenkins, Former CEO of Barclays
You might recall that MEDICI published an article in December 2018, in which we had predicted that going ahead, FinTech would see a continued uptick in terms of investments, M&A and deals with banks/FIs. On a positive note, we’ve noticed that the outlook is good for 2019; but let’s step back for a moment to look at the disruption-versus-collaboration paradigm banks have contended with, given the rise of the superpower we now call ‘FinTech.’
Until relatively recently, the overarching sentiment among banking industry experts was that FinTech startups would disrupt banking to a large degree. From disruption, based on evidence of collaboration being more mutually advantageous than the competition, the perspective has shifted to a generally positive outlook on banks and FinTech partnering.
In an op-ed piece in American Banker, ICBA’s Kevin Tweddle stated, “The banking industry is at the dawn of a great new era of FinTech partnerships that will change banking as we know it for the foreseeable future.”
Slowly but steadily, banks are buying into the new paradigm of partnering with FinTechs in different ways – it makes sense, considering that the FinTech industry reached a value of $32.6 billion in 2018. Key players on both sides of the fence (banks and FinTechs) are working towards bringing the two together to meet growing customer expectations – and to stay relevant in a technologically growing world when it comes to banks. A recent study by PwC revealed that around 88% of global financial service providers believe they could lose a substantial market share to FinTech innovators. Accordingly, in response to competitive pressure, 56% of the study’s respondents incorporated disruption into their core strategies. They have been actively seeking to invest in or collaborate with FinTechs, with over 82% expecting to increase the degree of their collaboration further over the coming years.
Accordingly, many incumbent FIs are in the process of digitally transforming to reimagine their core services and products, and their front-end and back-end processes as well. On the FinTech front, the product road-map of many such players is reflective of banks’ needs. The fact is, many FinTechs have helped banks digitize their processes and enhance their customers’ journeys. Let’s look at an interesting trend in this area:
Increased faith in & support for FinTechs from banks/FIs
Many banks, globally, have opened incubation centers where they encourage budding FinTechs to enroll. The FinTechs receive support in terms of industry and regulatory expertise, along with sample data sets to build upon – while this provides a great platform for FinTechs to accelerate their hypothesis testing and prototyping, it has also become a hub for banks to access cutting-edge and innovative solutions – this helps create a range of opportunities for building partnerships between banks and FinTechs which, in turn, may lead to investments or acquisitions. Data from a study by McKinsey shows us that 52% of the top 100 global banks formed more than 130 partnerships, with 37% of them having completed over 60 acquisitions as of 2017.
While there are numerous partnerships to choose from before we get into mapping bank-FinTech deals by segment, here’s a quick glimpse at a few interesting bank-FinTech partnerships in the US and Europe from 2018:
- PNC & OnDeck: PNC Financial Services Group’s PNC Bank will leverage technology from digital lender OnDeck Capital for giving loans to small businesses online.
- Citigroup & Thinknum: Citigroup’s partnership with Thinknum (a data startup) provides their clients with alternative data sets including social media traffic, job postings, price, availability of products, etc.
- Barclays & MarketInvoice: Among the most significant partnerships announced in the UK last year. This multifaceted partnership was formed to enhance the manner in which SME businesses in the UK can manage cash flow and accelerate their growth.
- JPMorgan & Plaid: JPMorgan partnered with Plaid to provide its clients with better control over their personal data.
- TD Bank with Flybits, Kasisto & Moven: TD Bank’s mobile app has become the number one app in Canada (finance category) on both iOS and Android. The bank has leveraged its partnerships with Flybits, Kasisto, and Moven for creating a contemporary banking experience.
- Goldman Sachs & Cadre: These firms formed a strategic partnership to allow Goldman Sachs’ clients to invest in a broad-based portfolio of US income-producing commercial real estate assets.
- HSBC & Avant: These companies have partnered with a view to offering unsecured loans to new and existing customers in the US.
As we’ve noted before, sometimes, larger banks are averse to partnering with FinTechs directly, for a variety of reasons. At times, the preferred route for banks is to invest or acquire the FinTechs they find of value. Data indicates that 2019 is set to be a positive year for Bank-FinTech collaboration. A recent paper by legal firm White & Case affirms this view, presenting information on significant deals in 2018.
Additionally, a study looking at M&As across FinTech shows continuing growth over eight years. Revealingly, it illustrated that for the most part, FinTech technologies are sought after by those in the banking/FI sector (56%).
Other studies also show similar trends. According to a recent survey of banking professionals and corporate investors conducted by Reed Smith, 94% of banks/financial institutions are planning two or more FinTech acquisitions in the next 12 months. Furthermore, the report shows that 76% of banks and financial institutions contend that fundraising for FinTech firms will increase considerably over the course of 2019.
If we look at it in terms of interest in FinTech segments, the data indicates that 28% of FinTech-focused banks and financial institutions consider robo-advisory (WealthTech, InsurTech) companies as critical M&A targets going forward. Additionally, 46% of banks and financial institutions expect cryptocurrency-focused blockchain technologies to experience the most significant increase in valuation over the next year.
Banks & FinTechs: Towards a common ground
In order to explore and utilize emerging technologies, older financial institutions are now organizing to innovate, developing labs to foster innovation and actively partnering with FinTechs offering expertise in areas beyond their strengths.
Through partnerships, both banks, as well as FinTechs, can continue to learn new ways to leverage data, evaluate risk, and conduct relationships with clients for enhanced efficiency. Consider the independent strengths of banks/FIs and FinTechs, alongside shared areas of strength between the two:
In forthcoming articles, we will bring you the latest trends based on bank/FI-FinTech deals and partnerships in 2019. Until then, based on what we see so far, we can say that it is only through such shared strengths that banks, FIs, and FinTechs can effectively collaborate, working together to find dynamic & new areas of synergy going ahead.