According to The Global FinTech Report Q3 2017, global fintech funding has had a compound annual growth rate (CAGR) of 44 percent from 2013 to 2017, with more deals and more investments being made year-over-year.
What the figure doesn’t say is, of the investments and deals, how many were made by banks, looking to learn more about the digital challengers seeking to take a bite out of their value chain. When it comes to how banks and fintechs should work together there are no clear answers, but the options are many and include collaborate, compete, invest or buy.
Ernst & Young’s (EY) study “Unleashing the Potential of Fintech in Banking” says that collaboration with fintechs is the key to banks building sustainable Return on Equity (ROE) in that it helps them to drive costs down, innovate quicker and build customer service. Indeed, in Digitalist Magazine, Deena Zaidi says that collaboration can grow fintech innovation, allows banks to benefit from the potential of technology that fintechs have tapped into and that consumers want, and, for fintechs, provides needed funding for their future.
For many industry thought leaders, bank/fintech collaboration is more than the future, it’s what each should be seeking now as a means of long-term survival. Jim Marous, co-publisher of The Financial Brand and owner/publisher of The Digital Banking Report, says that these collaborations need to work together to deliver the different facets of the customer experience that big technology companies already have- like personalization, speed and seamless delivery - to defend against the threats those same companies might pose in the future.
There was a time when banks tried to keep pace with fintech innovation, and to some extent, they still are with dedicated innovation teams and in-house development of technology and services. But, fintechs, given their typically narrow focus, less complicated structure, smaller size and ability to act in an agile manner, have generally been able to give customers what they want quicker, and often cheaper. For banks, among the main benefits to competing with fintechs is in their ability to scale more efficiently and that they possess a built-in-customer base, and don’t have to spend the time and effort it might take for fintechs to achieve a similar position. Banks also excel where many fintechs struggle, in risk and regulatory compliance.
As investment in fintech has grown, banks have increasingly gotten in on the investment game themselves. The reasons for these types of investment vary, but the bottom line seems to be that fintech investment gives banks insight to new technology and processes without dedicating their own resources, including talent and money, to building it in-house.
For all the good investment in technology does, EY’s report indicates that investment in technology may have some drawbacks too, including challenges in valuation, monetization, lack of exclusivity, privacy and security of data and potential misuse and mishandling of data by third parties.
There are times when buying a fintech company may be in the best interest of the bank. In “Should Banks Acquire Fintech Firms?”, Emily McCormick says that acquisition of fintechs doesn’t happen a lot by banks, in part because “due diligence and integration can be difficult, due in large part to a cultural disconnect between old-school banks and new-school tech companies. And it’s hard to determine a fair price for a company with little history and almost no financial track record.”
But, on the other hand, McCormick says, banks that are interested in acquiring should look for gaps in their strategy with revenue opportunities where a fintech may fit the bill. Even then, mature fintechs - those that have developed reputable, viable products - tend to make better targets for acquisition.
Ultimately, when it comes to fintechs and banks, the clear answer is that the each can best shore up the other’s weaknesses when they focus on working together, regardless of how that looks in practice. For some, a partnership makes sense. For others, becoming part of the company by acquisition is best. For global companies, like BBVA, a combination may be better still.
In a recent article on bbva.com, BBVA Compass Deputy General Counsel Mike Carlson said of the bank’s strategy with fintechs, “Partnership is an answer, but there’s not just one. For instance, at BBVA Compass, when it comes to fintechs, we’ve built our own, acquired them in certain instances, partnered with them in others and in yet others, we’ve invested through our Small Business Investment Company, Propel.”