Fintech and banks: Collaboration may help close digital delivery gap, boost joint value propositions
In the ‘open’ future, progressive banks will aspire to be financial service technology providers as opposed to financial services firms
The ongoing discourse surrounding the rise of fintech loses its rhetoric if we look at how the numbers stack up. About 73 percent of bank deposits, and about 7 to 9 percent of global banking profitability is projected to be at risk by 2020. Payments and wealth management are expected to feel the most heat with about 25 percent and 23 percent of business estimated to be at risk to fintech, respectively.
Juxtapose this with the success of some of these new players, and one can’t miss realizing the sheer magnitude of impact of the fintech movement. Alibaba’s payment wallet ‘Alipay’ has 520 million users, about $180 billion worth of asset inter-management transactions, and a valuation of about $70 billion. China’s P2P payment service ‘WeChatPay’, boasts a transaction volume of about $1.2 trillion annually.
These players have impacted virtually every aspect of traditional banking, and are eroding the business margins of banks and financial institutions.
Fintech offerings today span over 30 areas in the banking value chain, including payments, lending, crowd funding, trade analytics, and more. The areas fintechs have chosen to foray in, invariably reveal their propensity to circumvent regulatory compliance requirements. Add to this the agility their traditional peers typically lack, and you can appreciate how fintechs have been able to gain ground rather swiftly.
After a combative approach, banks are now beginning to see merit in partnering with fintechs to close the digital delivery gap, and in investing in them for joint value propositions. Fintechs do not have the burden of legacy infrastructure, but lack scale and understanding of regulations. On the contrary, traditional banks have an established customer base, and heaps of data, but lack digital agility.
As of 2017, top 10 global banks reported to have invested nearly $3.6 billion in about 56 fintech firms. Leading banks such as JP Morgan Chase in the US, and Santander in the UK, have also significantly increased their fintech investment. The key areas of investment include blockchain, payments, APIs, Cloud, and an overall proclivity to ensure the technology landscape is responsive to market changes.
Future may seem nebulous for banks with traditional business under constant attack, but there is a silver lining for those who choose to go beyond the haze. The remittance market is a classic example of this. The likes of Western Union have put traditional players at risk of losing significant remittance market share. But by tying up with fintechs in the blockchain space, banks stand to gain a three-fold advantage of being able to offer 24x7 availability and transparency, at a reduced cost of operation.
All this action points to the growing realization among banks that competing to ‘kill’ is clearly passé, and collaborating to ‘go to market together’ is the new normal.
Open APIs opened the floodgates to innovation in mobile app development, and led to the emergence of the app economy. Apple recently revealed that about 1.8 billion developers use the app store platform in China alone, earning a total of about $17 billion. Does the future of banking also lie in open innovation? There is little doubt. As third party service providers integrate banking APIs into their offerings, banks will benefit from the slew of data they can plough back into their business.
PSD2 in the EU, open banking in the UK, and closer home, the launch of UPI, are all examples of a world increasingly moving from ‘closed’ to ‘open’. These regulations are pushing banks and fintechs to come together to meet compliance requirements.
In the ‘open’ future, progressive banks will aspire to be financial service technology providers as opposed to financial services firms. DBS in Singapore is one bank already well on its way to align all aspects of business to operate like a technology company. It is forming partnerships and is firmly eyeing a spot amongst GANALF (Google Amazon Netflix Apple LinkedIn Facebook). Will DBS become the D in GANDALF? And how soon? Time will tell.
(The writer is Associate Vice President & Head – Finacle Product Strategy)