Today all banks and financial institutions know that their business is being disrupted by digital innovation. They also know that not responding to this threat will have existential consequences.
The banks’ initial reaction to this disruption was scepticism and denial. But as the likes of Revolut, Monzo, N26, SoFi and Chime started gaining momentum, achieving millions of customers and billions in valuations, the banks started investing in digital change. The aim was to beat the FinTechs at their own game.
"The FinTech gets new customers, and additional sales increased credibility through association with the bank and insight on how to improve its products"
But things did not go as expected. The big spend in innovation by the banks did not stop the FinTechs from being disruptive and from growing their customer bases. The banks realised that they didn’t have what it took to succeed. The talent was scarce, and legacy (not just IT, but also process and culture) was obstructive and winning strategies were hard to come by. At the same time, the FinTechs realised that even though they had better skills, were more agile and were increasingly better funded, beating the incumbent banks was going to be hard. After all competing with a recognised brand, millions of customers and billions to spend is not easy.
So, Banks and FinTechs realised that the future of both probably lies in some kind of collaboration.
These collaborations are taking many forms – that we can group into four major groups, as shown in the diagram below.
In this model, the bank allows the FinTech to sells its products to the bank’s customers. The bank can, therefore, provide a new product or service to its customers, spending relatively little time, effort and capital in creating it. The bank also gets a good insight into whether customers like the proposition so that it can decide what to do next: walk away, build in-house or deepen the relationship with the FinTech.
The FinTech gets new customers, and additional sales increased credibility through association with the bank and insight on how to improve its products. Customers get a new offering from their bank that they may find interesting. They also get reassurance from the bank that FinTechs can be trusted with their money.
In this model, the risks to the FinTech and customers are negligible. The story is mixed for the bank. It gets insight and customer satisfaction, but in exchange, it risks nurturing a competitor. Also, who is responsible if the customer is negatively impacted by the FinTech? Even if legally, the bank can insulate itself from things going wrong with the FinTech, PR and even regulatory pressures may force it to take on the liabilities.
Examples of this model of collaboration are the collaboration between The Royal Bank of Scotland and Funding Circle and the partnership between JPMorgan and OnDeck. Both were focussed on SME loans, and both relationships have now been terminated.
In this model, the bank works with the FinTech as a supplier. A new proposition is created by integrating the capabilities of the FinTech with the bank's own offering. To the customer, the new proposition looks as if the bank is providing the service.
This is a good way for the bank to test new propositions with customers at relatively cheaper costs than developing the proposition in-house. This model often does not provide exclusivity, as the FinTech could also collaborate with other banks.
A few examples of this is the partnership model is the collaboration between Bud and HSBC and the partnerships that Swedish firm Tink has created with SEB, ABN Amro and Paribas Fortis. Both Bud and Tink deliver personal financial management (PFM) services to the banks’ customers.
This is an extension of the Supplier model. The bank acquires a FinTech to acquire new capabilities but then leaves it relatively independent. The FinTech receives an injection in capital and access to the bank’s customers. The bank can see this investment as the means to experiment within a specific business area without impacting their existing operations. The bank also gains useful market intelligence and ensures exclusivity and control of a new proposition.
By leaving the FinTech as a separate concern, the bank shields it from any detrimental effect from the cultural and operational mismatch between the two businesses. This approach also makes it easier to retain expertise, as many talented employees of the FinTech may not want to be integrated into a big, structured, legacy organisation like a bank.
One downside is the amount of capital required. Should the experiment fail for any reason, the bank may have to write off a substantial investment.
A good example of this is the acquisition of Simple Bank by BBVA. Simple has been left relatively untouched operationally, and a customer would have to look hard to realise they are in fact, a BBVA company. More recently, the acquisition of Nickel by BNP Paribas is another example of one owner, two brands.
This the traditional acquisition model. The acquired Fintech is integrated and rebranded within the bank. This gives the bank the benefit of delivering innovation under its own brand.
This model presents all the risks with the Satellite model plus the risks associated with the integration of two businesses that have very different cultures and operating models. Unless this process is managed very carefully, the bank will find itself having invested in an asset that is deteriorating in value.
An example of this has been the acquisition of Final by Goldman Sach’s consumer bank Marcus. The Final brand was wound down, and the team and customer portfolio have moved over to Marcus.
As collaboration between banks and FinTechs become more popular, being proficient in partner selection, engagement and onboarding is increasingly becoming a core requirement for banks. Intelligent partnering requires capabilities analogous to those used when identifying senior talent. In the future, working with professional services firms that assist in partner selection will be as commonplace as working with an executive search firm.