M&A EXPERTS Peter Secher, chief executive of Fixcorp, and Alan Plaugmann, Fixcorp partner, explain why banks and fintech firms have to start working together
Everyone knows that fintech and banking make the perfect partnership. Today there are many more google-hits on “fintech partnering” than ”fintech disruption”. The lines are starting to blur between innovation-heavy fintech and traditional banks, as the idea of fintech disruption becomes a thing of the past.
A global fear of disruption tripled the acquisitions of start-ups during the third quarter of 2016 and a look at the latest EY Global Technology M&A Report left me with the impression that digital transformation has never been at a higher level, both in the financial services industry and in the world at large.
So why then are incumbent banks still offering the same products and services they always have?
Where is the digital transformation?
There is no doubt that leaders in the financial sector accept that the competitive landscape is changing quickly and they need to understand what the market will look like in five or 10 years’ time.
Firstly, they must consider customer loyalty. It is unlikely that their customers are going to leave them for a fintech company in the short term (i.e. over the next five or ten months), but this status quo is unsustainable in the longer run.
The market landscape already includes several peer-to-peer platforms which offer cheaper, more accessible service with fully automated compliance systems, allowing them to focus on onboarding new clients. Other platforms are able to offer SMEs easy access to finance by offering more favourable rates than most banks.
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Then they need to think about distribution. Over the next few years we are going to see smartphones, tablets and the ’internet of things’ playing a much larger role in retail banking. All clients, regardless of their age, gender or earning power, want availability, immediacy and intimacy in banking – on whatever device they happen to be operating at the time. This applies equally for equity investments and personal loans – why should a client have to sit in a bank waiting to find out if they can get mortgage approval, when there is a whole world of financing options out there at the touch of a button?
Of course, this leads us to the other key factor in the digital transformation of banks – trust. Banks have already weathered a series of storms which have painted them as distrustful and deceitful, whereas the relatively new fintech sector has not yet been hit by any major scandals.
Trust becomes a critical factor of your competitiveness, whether you are a fintech start-up asking clients to share their personal data, or an incumbent bank seeking to attract new customers.
Every bank we have worked with offers the same thing that they have been offering for many years, albeit marginally better than before. Operating costs are still far too high and in the long term, clients are bound to find better, faster and cheaper solutions. This is where M&A comes into play.
Transformation from within is difficult and riddled with legacy, cultural and technical issues. Invariably, it ends up becoming a leadership dilemma, looking inwards, rather than focusing on the external competitive landscape.
Asking existing personnel in a bank to build a new IT platform or come up with an internal team to suggest a new business model would be like asking a German engineer, experienced in making combustion engines – to develop an electric car. It will never work.
Collaboration is key
The only safe bet a bank can make these days is to collaborate by partnering, insourcing or acquiring IP rights or companies to design a digital ecosystem that will best suits the needs of their clients.
Many fintech firms have developed the finest operating systems you can imagine for their particular niche, so the value proposition is absolutely awesome. An SME can wire money to Japan with the blink of an eye instead of waiting three to four business days through a traditional bank, while it takes Toyota just 17 hours to make their customized Hilux.
Wealth managers offer almost cost-free global allocation in smart beta products replicating the world’s most successful asset managers who normally charge at least one per cent extra for performance fees.
However, all the smartest and brightest fintechs will face one serious issue – uncertainty.
At some point they will find themselves usurped by the next ’bright young thing’, or their product may lose traction with their client base over a certain period of time. And then there is the problem of regulation.
We know a number of fintech companies – including P2P lenders – who have great regulatory relations and a tonne of experience in the banking sector, yet they still have to wait almost four years to get a licence to operate. If they want to receive deposits in their new business model, they may be waiting even longer.
Banks already have this regulatory approval and they can offer a sense of financial stability that fintechs would not be able to find anywhere else. Likewise, fintechs can help banks to achieve the digital transformation that they so sorely need. But they must work together.
As soon as banks realise this, there will be a flurry of M&A activity across the fintech sector, because a long-term acquisition strategy helps mitigate transformation and innovation risk, and ultimately delivers better quality and value for the customer.