In the extensive media coverage of fintech over the years, much has been said about how financial technology is disrupting financial services, particularly traditional banks. A report released by Citigroup in March 2016 quantified fintech’s impact on the incumbents, projecting that up to 30 percent of existing banking employees could lose their jobs by 2025 as a result of technological innovation.
According to the report, investment in fintech has grown exponentially from $1.8 billion in 2010 to $19 billion in 2015. As new efficiencies and cost savings are found through technological solutions, it is inevitable that banks will need to reduce their staff to avoid suffering financial losses.
Has fintech become the nemesis of major banks?
Dangerous Rival or Potential Partner?
There is some data that suggests that banks are unprepared to compete with fintech. In the 2016 edition of its World Banking Report, Capgemini found that 96 percent of bank executives surveyed agree that their industry is moving towards digital banking. However, only 13 percent of these executives said that they already have systems in place to support it.
Rather than regarding fintech as a threat that will take away business from banks, financial institutions are starting to seize opportunities to partner and collaborate with startups instead.
“There is opportunity for banks to begin working collaboratively with [fintech companies], but they must formulate a rapid response plan to do so before the swiftly evolving bank environment outpaces their window for change,” said Anirban Bose, head of global banking and financial services at Capgemini.
An example of major banks collaborating with a fintech company is Scotiabank’s partnership with Santander and ING to invest $135 million for a round of funding in Kabbage, an automated lending platform for small businesses. In 2012, Scotiabank also bought digital bank Tangerine from ING, and it now leverages this acquisition to rapidly prototype and pilot innovative products and services, such as biometrics.
Another more recent example is BMO, which is sponsoring the Next Big Idea in FinTech program to foster innovation.
“While Canadian fintech has opportunities for growth, we are hoping that through programs, such as the Next Big Idea in FinTech, we can help support some of the great emerging startups we see in the sector and provide them with resources needed for success,” said Abdullah Snobar, executive director at the DMZ.
Fintech and Banks: A Regulatory View
Singapore, which is aggressively positioning itself as a major Asian fintech hub, is taking a very collaborative approach to the fintech versus bank debate. The Monetary Authority of Singapore (MAS), the island country’s financial regulator, created a FinTech & Innovation Group in July 2015 that is led by its new Chief FinTech Officer, Sopnendu Mohanty, a former Citibank executive.
“MAS' approach to fintech is to use the power of technology to help banks to succeed. We see fintech as an enabler,” said Mohanty. “Where success lies is in partnering with banks, and enabling banks to succeed.”
One U.S. regulator, the Office of the Comptroller of the Currency (OCC), is also openly promoting greater collaboration between banks and fintech startups. In addition, the OCC is seeking to working more closely with other U.S. regulators, such as the Consumer Financial Protection Bureau, to establish rules and guidelines.
In an unprecedented move, the World Economic Forum released a paper authored by executives at big banks, startups, and regulators from around the globe that strongly advocates for a common response to fintech. This collective group has provided a list of recommendations that focuses on preserving financial stability, ethical use of consumer data, and suitability of existing regulations. The goal of these recommendations is to create a framework that will allow fintech to sustainably grow and continue to foster innovation.
There is no question that financial services, as we have known them, are evolving and that fintech is leading the changes that we are seeing. In the early days of fintech, the common perception was that fintech startups were poised to slay the giant in the form of major banks and eventually replace them. Instead, what we are seeing more of is fintech companies partnering with large financial institutions in order to provide faster and more affordable services to customers.
Big banks and fintech startups have a great deal to offer each other. Banks have a large customer base, stable infrastructure, and deep pockets to fund new projects. Startups provide out-of-the-box thinking, technical expertise, and agility to adapt quickly to change. Together, they can be far more successful at improving the financial services customer experience than if they compete against one another.
“Collaboration is key to the democratization of finance,” said Jon Jones, President at Trulioo. “Fintechs, traditional and challenger banks, and regulators need to work together to deliver what customers want safely and securely.”