Graham Donald, managing director, Equiniti Pancredit, discusses the possible subsidence of 'digital disruption' opening up to a more collaborative approach between banks and fintech startups.
Over the past two years an unprecedented $25bn has been pumped into the global fintech market and it looks like this is just the beginning. According to a recent Accenture report, Q1 2016 saw a 67 per cent year-on-year increase in global fintech investment. That’s a $5.3bn injection of funds over just three short months.[1]
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Such vast sums are creating an environment where start-ups can launch, fail, rethink and re-engage, all in a matter of months. For long-established financial institutions, most of which are used to a conservative and slow moving services market, this sort of behaviour isn’t just unusual, it’s borderline bizarre. For the new breed of start-ups, however, every stone is ripe for turning from the way customers consume financial services to the back-end systems that move money around the world.
Two years ago, the market had an adversarial feel. ‘Disruption’ was the industry watchword and the start-ups were on the offensive. How much business could be taken from the traditional banks and lenders? Could the new groundswell of start-ups signal the end of traditional banks entirely?
Since then, things have settled a little, resulting in a new dynamic. The number of start-ups adopting a collaborative model is increasing. While a high proportion of fintech companies continue to compete directly with traditional lenders, Accenture reckons that 44 per cent of global fintech investment is now going to start-ups that position themselves as partners, not competitors, of established players.
This is good news, both for the industry and the customer. Enabling larger players to deploy digital services to their customers will guard against service fragmentation which, if left unchecked, could result in consumers’ financial data strewn across different providers making it difficult to manage coherently.
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By GlobalDataThrough collaboration, traditional lenders also get the opportunity to benefit from the agility and innovation that has, to date, been a defining characteristic of the fintech industry. The start-ups gain a steady and reliable revenue stream from the bigger players, together with a viable exit strategy (via trade sale). Moreover, the raft of new digital services will be subject to close quality control and governed by the closely regulated environment under which the big banks and lenders operate.
To take full advantage, however, the traditional players need to reorganise internally since partnerships bring their own sets of challenges. The market is crowded and start-ups come and go. How can a bank be sure to pick a winner? What’s more, most fintech companies have a very specific product or service focus. How many partners will a bank need to establish before it can offer a comprehensive suite of cutting-edge digital services?
Herein lies a big opportunity for next generation financial outsourcers, particularly those who, through acquisition, are able to offer a suite of digital services that can be wrapped up and delivered to a bank through a single managed services contract. Such a proposition requires some clout, however. A bank will be seeking to offload as large a part of their business as possible through such a partnership, meaning that the outsourcer must have the technologies and services ‘ready to go’, together with the regulatory compliance, the specialist processes needed to administer the services and enough skilled staff to support the service rollout as they scale up.
Those capable of serving this need should be making themselves known to banks, now. The fintech market is developing at a ferocious pace and it is unclear how long this current air of collaboration will last. What we can be sure of, however, is that things will change again. The digital market is upon us and it is now down to us all to keep pace.
