Banks have always been top of the food chain. The threat of FinTechs (Challenger Banks are included in that term here) have done little to change that fact in terms of numbers of customers and sheer size. When the phenomenon of FinTechs hit the banking scene it was very much as competitors.
Most of them had non-bank regulatory permissions and they used bank payment rails and infrastructure in the provision of their services. Most FinTechs came into the competitive financial services world because they believed they had a niche that enabled them to improve on an existing model and provide products or services better than the status quo.
To support this competition to the incumbent banks various changes took place; it became easier to become a Challenger Bank thanks to lighter and proportionate regulatory requirements and Open Banking initiatives in which the incumbents had to allow connectivity via APIs. This has spurred a massive influx of investment in FinTechs with the US and UK being the top two destinations globally. India and Indonesia occupy the 3rd and 4th slot according to data from Innovate Finance. In European terms, the UK is dominant with close to half of FinTech investment and with more deals and capital invested than Germany, Sweden, France, Switzerland and the Netherlands combined.
These dynamic market fundamentals have seen a shift in customer behaviour during the pandemic but rather than it being a transformation it has more of an acceleration. However, what we may be seeing is a change in the relationship between the banks and FinTechs. Incumbent banks with their premises-based approach are having to speed up their efforts to become digital banks. Those with proven business models and a good customer base will probably thrive for the upstarts, but those coming to market with “nice to haves” without an established network are going to struggle.
So, the current dating world has the incumbents a bit behind the curve in terms of digital provision but ahead in terms of their large customer bases, however the newcomers are ahead in digital provision and innovation but behind in terms of customers. Also, many FinTechs are low on cash, so many predict that the match made in heaven is for the incumbents to acquire the new kids on the block. More established non-bank brands, such as Cashplus, a specialist SME lender, are becoming banks themselves to compete against the Challenger banks more effectively.
Certainly, with the reported interest in Starling Bank late last year from Lloyds Bank and JP Morgan Chase, that is a viable assumption. That challenger is playing hard to get and is securing funding and planning to continue growing its operations and scale across Europe, having recently been the first to hit breakeven on the route to profitability. What is interesting is to read reports that, presumably a jilted suitor, JP Morgan Chase is set to launch its own digital bank, branded Chase, in the UK and is slated to compete with the established FinTechs.
The SME market may well be ripe hunting grounds for FinTechs with research from Marqeta, a card issuing platform, finding 85% of SME’s are “frustrated” with their business banking experience and three quarters of them stating that their bankers “must do more” to offer better digital capabilities. In light of the pandemic this may well continue to drive this important segment into the hands of the FinTechs and winning them back is likely to take more than a card and some roses!
Some banks are wooing the digital firepower they want with cash. National Australia Bank is looking to buy neobank 86 400 to combine it with its digital offshoot UBank. However, the Sydney Morning Herald reckons that this particular marriage may be objected to by the regulators who “are keen to stave off the Big Four eating up their FinTech competition” and this trend globally is likely to be an obstacle to the incumbents from casting their eyes (and money) at successful FinTechs.
With initiatives such as the UK’s New Payments Architecture (NPA), which the Payment Systems Regulator (PSR) is consulting on, showing that those still relying on analogue distribution need to embrace next generation digital banking solutions to keep pace with the changing habits of their customers. The PSR has stated that the “NPA represents a significant opportunity to meet growing demand for digital payments, further improve resilience and support increased competition, to benefit people and businesses across the UK”.
Many see this relationship turning into a threesome with banks, payments firms, and cloud service providers coming together to serve their customers' digital demands in a secure and resilient experience. For many institutions, this will mean they need to start by embracing and acquiring an ePayments platform that offers all the connections required while integrating with the myriad downstream systems.
If you want to take a peek at the changing direction of Cupid’s arrow this Valentine's Day, please feel free to get in contact me at david.woolcock@eurobase.com. We would be happy to discuss any aspects of these relationships and how to deliver cutting edge technological solutions.
