One of the most frequent discussion topics was collaboration between Fintechs and incumbent banks. As digital disruption in banking emerged a few years back, the atmosphere was mostly confrontational and old universal banks were thought to become killed by a hundred cuts: Category killers – agile and focused Fintech startups – were about to steal banking customers with superior digital user experience and push existing banks to being commodity providers behind the scenes. At the same time, new Banking-as-a-Service companies with modern cloud-based platforms and no legacy burden were able to provide much more agile infrastructure and shorter time-to-market, also challenging incumbents’ roles as infrastructure providers. The future of old banks didn’t look rosy.
But the road was not paved for the Fintechs either. They were lacking one critical asset that the incumbent banks have: Customers. In financial services trust is a must and it might be hard to earn from masses if you are a bunch of young engineers with seed funding from risk-loving venture capitalists – even though trust in banks were at an all-time low after the financial crisis. Also, the number of applications people actively use is saturating and it is harder and harder to gain traction with financial services apps in a fragmenting market. So, it has become clear that Fintechs need banks like banks need Fintechs.
That was also the spirit of the Paris Fintech Forum 2018: Everyone was embracing the symbiosis between banks and Fintechs. In their pitches Fintechs highlighted the value for banks that they can offer, how they can simplify and intensify banks’ processes like customer onboarding, fraud and risk management, credit scoring and customer services and communication by utilizing things like AI, robotics and chatbots. Banks praised their new buddies who innovate on top of banks’ open APIs, or provide various platforms like back-end platforms, API platforms, data aggregation platforms etc. New roles, AISPs and PISPs introduced by PSD2, were seen complementing, not substituting banks’ capabilities and offering. Also, venture capitalists supported the marriage and told they see most potential in “under-the-hood” innovations focusing on releasing banks’ working capital, taking advantage of regulatory changes, or other less sexy issues.
Despite the fact that the collaboration is widely embraced, the forerunners also start to see obstacles. Getting started and launching new innovative services in collaboration with 3rd parties is getting rather easy. What’s trickier is to scale up the innovations by leveraging an organization’s capabilities. Timing and the degree of integration, cultural fit, conflicting or overlapping interests, internal competition and a license to cannibalize existing business are not trivial questions. In fact, modern banking business requires new types of culture and leadership and maybe that is one of the most important learnings Fintechs can provide for incumbent banks.
There is however one group of Fintechs which are not seeking collaboration with incumbent banks. That group is neobanks, the born-digital banks challenging the status quo in banking. The list of neobanks is ever evolving, containing names like N26, Tandem Bank, Monzo, Starling, Atom Bank, OakNorth, etc. A representative sample of these were present also at Paris Fintech Forum. Typically, the neobanks’ value proposition is based on improved banking: The services itself are traditional banking services and not so innovative as such but how the services are delivered and to whom differs from traditional banking. Using the services has been made as easy as possible and the target group is carefully selected, including e.g. millennials, underbanked segments, immigrants, and other marginal segments which are outside of incumbents’ reach or direct interest. The challenger banks collaborate with other Fintechs e.g. by complementing their service offering with services provided by specialized category killers, and in that way, manage their own ecosystem of financial services. N26 and their partnerships with e.g. TransfersWise and Younited Credit is a good example.
Incumbents have also woken up and started to launch challenger banks of their own, like HelloBank! by BNP Paribas, ImaginBank by Caixabank, MoneyYou by ABN Amro and Compte Nickel, which was acquired by BNP Paribas. The rationale of incumbent-backed neobanks typically is to ensure the ability to stay relevant for the customers of the digital age and to whom the parent bank is not a natural choice or competitive enough. The strategic role of the neobank units is quite often customer acquisition and the offering typically grows when the neobank units learn the needs of their customers and how to take the most out of their business.
Hence the incumbents are fighting back. And as Frédéric Oudéa, CEO of Societe Generale, said, incumbents have proven their capability to provide an online only-banking experience, but corporate banking and wealth management rely still rather heavily on physical presence. According to Mr. Oudéa this is due to the more complex nature of those services, and because customers request sophisticated advice from their bank. However, Jay Sidhu, CEO of BankMobile, didn’t share that view and claimed that customers already get better advice from Google. So perhaps it was not a surprise for anyone that artificial intelligence was one of the most visible themes at Paris Fintech Forum. With the help of AI combined with the enormous availability of data through open APIs, banks can provide also advisory services much more efficiently through digital channels than by humans in branches. In addition, AI improves banks’ abilities to manage their risks and enables them to make better credit decisions. In fact, customers are expecting banks to improve their ability utilize the data they already have to serve the customers better. AI provides numerous opportunities for banks and the journey has only just begun.
The two days at Paris Fintech Forum proved that the symbiosis between banks and Fintechs is becoming deeper and deeper. The two obviously need each other and the market is evolving towards digital ecosystems. Started initially from payments, the digital disruption is avalanching over every aspect of banking. We’d say that the disruption has made banking great again: the market is dynamic and each player, large or small, needs to find a way to differentiate and to be relevant for its customers. Thus, in the middle of the enormous transformation that incumbent banks are experiencing, it’s worth remembering that basic business rules are still valid.
So, what should we expect that the next 12 months will bring us? Here’s our bet:
Is this what the market will look like in February 2019? That remains to be seen.