Big banks have, for most of our financial history, been king. Customer data has been a coveted asset, while fresh competition has often been labelled as a threat and innovation has retained an unhurried pace. Then along came the fintechs, who, with the aid of disruptive (often data driven) technologies, have seen exponential popularity in Australia and beyond.
So how can the big banks and established financial institutions turn the fintech threat into an opportunity? To answer this question, we sat down with FinTech Australia’s CEO Danielle Szetho and our very own ‘big four bank renegade’ Joe McGuire, to find out why the future of banking lies in fintech collaboration.
Opportunity vs Adversary
Following the 2008 financial crisis, traditional banking took a significant knock. This came at the same time as fintechs – armed with the willingness to engage with powerful tech disruption – saw new openings in legacy infrastructure and took this decade’s most innovative steps yet to fill them. Now, up to 28 per cent of banking and payments enterprises will be at risk by 2020.
Banking’s traditional comfort zone is no longer their ideal operation space as the digital revolution continues to unravel around them. Many customers in the past were dissatisfied with what the market had to offer, and this has driven fintech’s success. People now want more options, better deals and full integration with their smartphone and other modern tech preferences – a field in which banks have been slower to fully embrace.
Joe McGuire highlights another shake-up in the competitive dynamics of the market as open banking regimes set to solidify across the globe in the near future (next year in Australia): “After the valuable commodity of consumer data is made readily available to licensed users, customers will be able to switch service providers with the mere swipe of a smartphone screen, and fintech innovation will have yet another notch in its belt.”
However, as opposed to viewing fintech’s advantages as threats (digital prowess, fresh perspectives, relevant customer engagement and cheaper, faster, easier interfaces) banks are beginning to acquire, invest in, outsource, work with and learn from the successes of fintech startups.
Have we reached a turning point?
FinTech Australia CEO Danielle Szetho believes that “the Australian financial services industry is weaker as a whole if there aren't opportunities for fintech startup companies to partner with banks if they wish to. Our census of the Australian fintech industry last year identified that many fintechs have difficulties forming partnerships with larger financial institutions, and regard these difficulties a significant impediment to their growth.”
Whether or not a cohesive partnership between the two comes into play, they will inherently affect one another – and collaboration between fintechs and banks is what poses the most sustainable way forward.
“Fintechs will inherently benefit from the unparalleled experience, regulatory expertise and client bases of the bigger players."
Joe McGuire, who has worked for both big banks and fintech, believes that this bilateral relationship is what will drive the future of the financial sector: “Fintechs will inherently benefit from the unparalleled experience, regulatory expertise and client bases of the bigger players. Traditional banks have spent the most part of their operational history building trusted, loyal relationships with customers and testing functional infrastructure to within an inch of its capabilities. This purely human knowledge cannot yet be fully replaced by fancy new tech, and will be valued by young businesses trying to break into the market.”
Big banks, bigger budgets
Last month’s federal budget significantly shaped the potential route of this partnership in the foreseeable future in Australia. Although fintechs were expecting a focus on 2018’s open banking regime in the budget announcements, they also got a proposal for an expanded Regulatory Sandbox, a confirmed date to remove GST from the purchase of digital currency, a pathway to mandate Comprehensive Credit Reporting, steps to reduce barriers for fintech firms to become Digital Challenger Banks, and proposed legislation to expand Australia's equity crowdfunding regime to Private companies.
Szetho reported that “many of these recent changes are going to make it much easier for new fintech businesses in Australia to obtain licenses, funding, and make higher-quality, lower-cost products for customers.The budget changes are a sign to the broader banking community that our Government is keen to drive greater innovation and choice in financial services. A big part of that will come from improved collaboration mechanisms.”
We’re in this together
Globally, partnerships between fintechs and banks are already reaping rewards. A recent survey of UK incumbents noted that 54% of working fintech collaborations have already boosted revenues for banks. In broader Europe, a cross-country partnership between Groupe BPCE and their recently-acquired startup Fidor is revolutionising BPCE’s digital offerings. Both Visa and PayPal are also actively signing partnerships and testing out collaborations.
“Collaboration with fintech startups is important and should be prioritised."
Closer to home, National Australia Bank (NAB) launched an innovation arm in 2015 with the intention of investing $50 million over three years in startups to fuel their own customer-centric applications and products. NAB made good on their initiative a year later with an investment in Sydney-based technology startup Data Republic Pty Ltd.
Banks have a lot to gain in at this crossroads – particularly when it comes to taking full advantage of fintechs’ technological entrenchment.
One couldn’t have said it better than Szetho when she reiterated that “collaboration with fintech startups is important and should be prioritised. More efficient collaboration will ultimately benefit the banks, our fintechs and indeed the consumer and economy overall.”