Two years ago, I attended a seminar where more tales of woe for banks were being predicted at the hands of ‘fintech upstarts’. The sector was ripe for disruption, especially those ‘fat cat’ bankers who were too complacent to see it all coming. I wondered if I should be feeling happy, because Silicon Valley Bank was working with so many of these upstarts, or sad that all banks were about to be bypassed, undercut, destroyed or simply rendered irrelevant.
The word itself, fintech, is very broadly applied – we see financial software, lending platforms, ecommerce and marketplaces which are essentially payments businesses, domestic and cross border payment processors, individual product disruptors (eg FX, credit cards) and the list goes on. As these businesses often play on the edge of the regulatory markets, there must be discussions long into the night of the pros and cons of getting a license or relying on another party who already has one, and therefore create a mission-critical reliance on that party.
One thing is for sure, the Financial Conduct Authority will ensure that fintech businesses are treating customers fairly. Fintechs face huge compliance risks if they don’t adhere to conduct rules. Banks know that reputations are everything, and if your customer connection is merely through an app, try relying on customer loyalty when the chips fall wrong.
CB Insights just released its 2016 Fintech Report. Global financing was down 13% but still an eye watering $12.7bn. Deal count was flat. Non-US markets were seeing growth, the US was down 29% to $5.5bn. But the jury is still out – with a lack of IPOs, not even a rich pipeline will see these investments go public for some time yet, and talk of flat being the new up could point to a valuation squeeze if some struggle to exit.
I continue to see almost daily articles about the death of banks at the hands of fintech. We’re forever being reminded that banks are dinosaurs: deep in denial, critical of these ‘upstart startups’ and lacking the flexibility of mind to embrace the inevitable, stuck with old technology, high costs of acquiring customers and doing business, and without the resources to fix the problems.
But within the community itself, something has changed. Something that is subtle but quite profound for the broader industry. It turns out that fintechs often need banks to provide infrastructure and regulation, and banks (clearly) need fintech businesses to help them modernise. There’s that Silicon Valley buzzword…collaboration. The fact that SoFi has acquired a bank further underlines the fact that banks and fintechs are fast becoming intertwined.
There are the smart banks out there – those with team dedicated to connecting with fintech businesses and understanding how they can learn, partner, invest, and allow themselves to be challenged. Banks, after all, do tend to have amazing customer franchises and despite everything, brands. We have seen banks partner with lending platforms to distribute loans and create automated lending decision platforms with backend straight-through processing and – hey presto – another business model emerges.
So, how does this leave me feeling as we hurtle through 2017? I’m happy that despite all the uncertainty out there, I work for a bank that thinks and acts like a fintech business in high growth mode, puts clients first and sees the possibilities in a changing financial services industry. That said, no bank should ever be complacent.