“We’re too big to fail”, said no banker after 2008. The last couple of years has brought another huge change in the industry and another statement to forget about: “We’re too big to worry about fintech”.
Digital products and services in the finance world have changed the way customers think and what they expect from companies handling their money. Is there enough room on the market for both traditional banks and fintech disruptors? We asked industry experts to share their views on the possible scenarios for the two faces of banking: traditional and digital.
I believe that the role of banks will change significantly over the next couple of years. So I wouldn't say that there is just one thing on either side. The relationship that banks need to have with their customers to stay competitive with FinTech’s means that a bank today is not going to look like the same bank in five years.
The FinTech landscape is extremely diverse, and from niche players to mature challengers, each will have different challenges in the current crisis. While early-stage startups will struggle with a risk-averse market, established players might experience a mixed perspective on their more innovative solutions.
Sometimes the market favors stability over convenience, and this might be one of those moments. Still, FinTechs thrive on disruption, giving them many advantages. Often built on agile infrastructure and principles, they're positioned to rapidly adapt. Banks tend to entrench themselves in their legacy products and services, and might even kill promising new projects due forced cuts. FinTechs will adapt or die. It’s something that defines the attitude of FinTechs and why a bank’s best defense could ultimately lead to its failure.
I believe both worlds have a lot to learn from each other. On the one hand, traditional banks have hundreds of years of experience in dealing with regulations and have passed through many structural changes. As a consequence, they gained experience in looking at business models and long-term trends.
Recently, bankers have also learned they can’t control the whole value chain of finance anymore and that fintechs have become a critical source of innovation. By working with these new incumbents, traditional banks have acquired new methods to build products and better approaches to customer experience. Fintechs are also faster in adopting new technologies and business opportunities. Collaborating with them helps to bring new solutions faster to market.
On the other hand, for the new players having a recognized bank as a partner brings trust, broader access to capital, and a potentially larger customer base. Experience shows it can boost their expansion, help enter new markets, and gain the confidence of the end customers, which is ultimately the main asset in this game. There is a future to creating complementary business models, and I believe both sides have chosen this collaborative path.
I have a notion that we will see many banks adapt, as they have to think a lot more like fintech companies. Banks are too big to fail, but with the modernization of banking regulations, we see that new players enter the market with new takes on the old banks' home territory. We do also see new markets popping up and paving the way for new business opportunities and capabilities of the end users.
Most banks of a certain size have a really hard time adapting to the rapidly changing world and it is in their favor that the markets are not changing as fast as they could. In Denmark, the government stepped up to assist companies who were heavily affected by COVID by making loan guarantees. We have a funding website that could quickly adapt, whereas the bureaucracy of bigger banks required a few extra weeks to get the program up and running.
This lack of flexibility will, at the end of the day, be a problem for bigger banks. As regulation requires faster and better adaptation to new legal requirements and/or market demands, they will have to find a way to modernize themselves and the way they see banking and technology. There are plenty of startups that do most of what big banks do, but better. Banks will have to buy such companies or innovate to stay relevant in the long run.
For the next many years, they can possibly keep their throne. However, in the long run, being passive can be the death blow. A bank like Revolut, founded just 5 years ago, already has 12 million customers. That is impressive for the fintech industry and should be viewed as a threat to the banks. Ant Group’s (formerly Alipay) IPO is predicted to reach up to $35 billion – the company was founded back in 2004. As technology advances even further, we will see more of such quick growth globally. It is up to the banks to stay relevant because, as time goes by, they might slowly lose their “too big to fail” safety net, which will leave them quite vulnerable to the next economic crisis.
We are expecting to see even more change for the benefit of the customers regardless of financial needs.
Leading digital transformation seemed to be the fintechs’ area of expertise, or at least such was the impression, while private banking was asleep during the first years of that transformation. Private banking also seemed to miss the incoming change at first. However, it is also true they’ve been woken up by the noise of the best force combination being technology and the financial industry.
Fintechs are fresh, disruptive, and they are giving consumers a chance to make cashless, hassle-free purchases through many e-wallet offerings. But they are also able to connect big companies to end customers by enabling cross-border payments around the world, no matter where the end customer and service provider are located.
On the other hand, private banks have a long history and solid experience in the financial market. They are ruled by Central Banks and have impeccable KYC (Know Your Customer) and AML (Anti-Money Laundering) mechanisms. That’s a bit challenging for fintechs, which sometimes face the business more as a tech solution rather than a financial one. The best way to rule in the future is by combining that synergy of the two giants, the great “Vikings” of the private banking industry, and the fresh and disruptive business of fintechs.
This question feels biased and presumes that there is a predominant winner in a zero-sum game. In order to win a zero-sum game, one side must lose. That’s simply not how relationships between banks and fintechs work and how these market opportunities are playing out. My belief is that fintech and bank opportunities are an infinite-sum game.
The dynamic between fintechs and banks is typically full of nuanced trade-offs where the ownership of the value chain, all the way from the UI in a web application to the database where the information is stored, isn’t likely to be vertically integrated at the bank or fintech. In our new reality, a fintech might own the UI and a bank might be the custodian.
In other cases, ironically, the fintech might be the custodian of an alternative asset and the bank might own the UI. There are so many scenarios where the market is so vast that everyone can win just by learning to share the upside.
This is how deals get done and more than one company or idea wins — by combining it with another. Personally, I think we can all learn to get along and probably win together as a result.