The Future of Alliances
“The best contribution of FinTechs, will be in customer experience – channels, on-boarding tools and marketing – given that they have launched into the sector by re-thinking the target experience, unencumbered by ‘traditionalist’ fixed ideas.”
Every bank and every FinTech will affect the future of the collaboration which will govern the sector’s future. The exceptional characteristics of each of them will be the factor which establishes the rules of this new era of collaboration. But at first glance, everything points to FinTechs being truly important in ‘commodity areas’ in which they could accelerate the evolution of internal and control processes. The impact will be felt both in a reduction of costs and in an increase of income. However, the traditional bank business model deriving income from charging fees and commissions, and interest rate spreads -under pressure now more than ever- has led some banks to sense a significant opportunity is opening up for collaboration in the utility area, because this is where the business might gain the most added value. Therefore, exploiting this area is of real interest as a more sustainable and longer-term boost to profits.
Where banks see differentiated value in the services that they offer directly to their end customers, the so-called ‘vital ground’, they will look to retain control. There may be opportunities to collaborate with FinTech partners, but this will be the banks directing operations and the FinTech firms accelerating delivery.
In the next wave of activities, where low-cost, scalability and the ability to manage at arm’s length are key, banks will likely look to buy these ‘commodity’ functions on an ‘as a service’ basis. Here, FinTechs can play a role due to their technology advantage, although we see this developing as more of a scale play with relatively few players emerging as providers. The final and most interesting area for disruption is where the banks feel that the industry can play a greater role, both in the control it exerts and the value it creates.
These ‘utility’ services benefit from network effects, with greater volumes creating greater value, and the ideal scenario being full industry participation in a single utility. Fraud prevention is the obvious example here, as an industry aggregated view of data and fraud incidences would be highly valued.
Banks will continue to control their key areas of differentiated value very closely and these are the areas in which FinTechs will have a more limited space to work unless they offer real internal revolutions. This has not happened up until now and experts believe that they have little to offer in this ‘vital ground’ of a bank.
Until now, the banking sector has been slow to embrace FinTech collaborators and it seems to have ruled out that new technology services companies might be the missing link in improving business strategy, control of market risks or client/investor control. If they pursue collaboration, they will do it via joint ventures, potentially limiting the field of play as this model may not align interests of all parties, particularly where Fintechs crave continued independence and non-exclusivity. We are yet to see what will happen in the field of cybersecurity, but this again appears an attractive area for disruption.
Within the ‘vital ground’ areas for banks, we expect the boost that FinTechs can offer to be centred on customer experience and that collaboration will occur through joint ventures to avoid blocking the creative edge of FinTechs. Even though FinTechs will have freedom, banks will exert powerful control over all the activities they consider vital to their business activity.
The best contribution of FinTechs, however, will be in customer experience – channels, on-boarding tools and marketing – given that they have launched into the sector by re-thinking the target experience, unencumbered by ‘traditionalist’ fixed ideas.
The question is whether the FinTechs will occupy an internal position within the banks or whether they can work from the outside. Without a doubt, this decision will depend on the play they wish to offer the banks and the collaboration model selected.
Banks must make a decision based on how they value the FinTech’s ability to contribute and the need to interact with other areas of the bank that are more difficult to source from outside.
The experts who took part in the panels organised by EFMA and Axis Corporate believe that some of the ‘commodity’ activities will cease to fit inside the banks’ structure, due to the need for collaborative models. IT and Operations functions are at the heart of this ‘smartsourcing’ approach, for which banks have sought external providers for a long time, aware that cost and speed are critical, and that direct control is less important.
The cost of buying-in FinTech services will be a key element when deciding the best type of collaboration deal with banks. In the utility area, for example, FinTechs do not yet offer enough scale or added value to make them viable partners. However, the emergence of new platform players (Solaris Bank is a good example, through its ‘passport’ banking platform) may be set to change this. More established technology firms who operate at scale may also look to move into this area more actively, as their legacy ‘licence’ business continues to decline.
Beyond these examples, the banking sector is under further pressure to work with an ‘open banking standard’ (API) in which banks and FinTechs will become ‘utility providers’. But this will not be a feasible situation in the short term; banks must first decide which future scenarios best fit their current vision. One option is playing the role of product provider for other intermediaries, another is to accept the product innovation challenge and ‘re-imagine’ themselves, or enter a price war. The future is uncertain. It is not known whether the new FinTech operators will work to traditional NII and Fee Income bank revenue models, or a new ‘share of value created’ approach.
One key question remains, however. Would banks be willing to welcome that level of sharing?
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