Bank-fintech collaborations are the way forward

On October 1, 2019October 1, 2019 By mehranmuslimiblogIn Banks, FintechLeave a comment

Since fintechs emerged on the financial scene there has been a lot of talk about how the banks would quickly become irrelevant. Before fintechs arrived, the banks developed their own technology and solutions that supported their unique needs, they are now taking a new approach.

Bill Zayas, President and CEO of Dade Systems told PYMNTS that there are new trends in 2019. First, third-party providers have started to create solid software apps that are meeting different needs. The banks are then licensing a fintech’s code and taking it apart to fit their own requirements. The advantage for the banks is that someone else does all the development work. However, the banks still have to configure, install and support these customised applications.

There is a problem with this, Zayas explained: “They couldn’t turn to the vendor because they had modified it so extensively.” As a result the banks stayed a step behind the fintechs, simply because they had hashed the code up so much that the fintech developers couldn’t help them.

This has changed quite radically in 2019, Zayas says. There is much more collaboration between the banks and fintechs, because the fintechs are not held back by a legacy environment in the same way as the banks are. The fintechs can tap into “new tech stacks and develop new solutions that fit the marketplace and take advantage of the latest technology,” Zayas remarks. He also said that the bigger banks were not running solutions in the public cloud, for instance, because they had a closed-loop environment; fintechs, by contrast, can take a much more ‘new tech’ approach from the start.

It is worth noting that fintech collaborations can also serve as a defensive strategy for the bank. For example, if a fintech has direct access to a bank’s customers, those customers may prefer to go with the service offered by the fintech. The bank would effectively b cut out of the loop. But by collaborating with the fintech, the bank can retain control by bringing the solution to the customer under its banner, and because of the bank’s resources, it can bring the solution to market faster.

Fintechs are increasingly offering white label solutions to the banks. This works behind the scenes and serves as the engine powering the solution in a less costly environment. It’s a ‘compromise’ way forward for the fintechs and the banks that ensures the survival of both.

The 2019 outlook for banking

On October 1, 2019 By mehranmuslimiblogIn Banks, FintechLeave a comment

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I’ve just come across a new report from Deloitte titled ‘2019 Banking and Capital Markets Outlook: Reimagining transformation’. I was interested to read its opening sentence: “The global banking system is not only bigger and more profitable but also more resilient than at any time in the last 10 years.”

According to The Banker’s Top 1000 World Banks Ranking for 2018, total assets reached $24 trillion and the return on assets was 0.9 percent. This data would seem to say that at the end of the decade following the financial crash (caused b the banks, lest we forget) banks are in great shape. You may feel they don’t deserve it, but that appears to be the situation.

Banking health isn’t global

However, this healthy environment isn’t a global phenomenon. Deloitte’s says that the USA is ahead of its European counterparts. This is due to “aggressive policy interventions and forceful regulations” Deloitte’s claim, and the result has been healthier American banks.

By contrast, European banks have been held back by structural deficiencies, overcapacity, low/negative interest rates, and the absence of a pan-European banking regulatory agency have all likely contributed to European banks experiencing persistent profitability challenges.

European banks have been shrinking in size, retreating from international markets and exiting businesses that were profitable for them in the past. To illustrate this, just look at the fact that the profits of the top five European banks dropped from $60 billion in 2007 to $17.5 billion in 2017. However, Western European banks seem to be faring better these days, with an ROE that grew to 8.6 percent in 2017, compared with 5.5 percent in 2016

On the other side of the world, the Chinese banks have been the big story. Not only has the Chinese banking industry has surpassed that of the European Union (EU) in terms of size, the world’s four largest banks in 2018 are Chinese. Compare this with 2007 when there were no Chinese banks in the world’s Top 10.

A recession is coming?

But the Deloitte report sees some gloom on the horizon. Deloitte economists are predicting a 25 percent probability of a recession in the United States in 2019, and this is likely to weaken US economic growth in 2020, if not in late 2019. Although we are almost at the year’s end already. And the Deloitte forecasts for GDP growth by region shows most of the regions in decline, or flatlining just past 2020.

Where can the transformation happen in banking?

Partnership with fintechs is one approach. Deloitte says more digital transformation is required. However, Deloitte asks, “But how much of this change is purposeful and strategic? “ It comments: Banks should bolster their conviction and reimagine transformation as a holistic, multiyear process and “change how they change.”

Deloitte also suggest that the transformation “should fundamentally start with banks reaffirming their role in the global financial system.,” but it adds a warning: “Banks should discard grand visions of becoming “a technology company” and instead focus on customers, enhance trust as financial intermediaries, facilitate capital flows, and provide credit to the global economy with data as the bond that sustains the amalgam of technologies—AI, automation, cloud, core modernization, etc.—best suited for the purpose.”

When banks partner with fintechs

On September 26, 2019September 26, 2019 By mehranmuslimiblogIn Banks, FintechLeave a comment

One way in which the banks have tried to catch up with the digital age is by partnering with fintechs. Basically, it saves them the problem of finding new staff and creating a specially developed department, and it makes sense.

There has been a noticeable growth in bank-fintech partnerships since 2018, and it appears to be happening in three different ways.

First, banks are making direct investments in fintech startups. Second, the banks are integrating new startups’ technology into their own applications by using a ‘white label’ agreement. Third, at least one in three banks plans to buy a fintech in the next year.

Mergers and Acquisitions

It would appear that banks and fintechs are moving away from seeing each other as competitors, and instead acknowledging that they need each other. We are seeing banks being more proactive in their approach to collaborating with fintech firms, and there have been hundreds of bank-fintech partnerships taking

place via strategic investments, innovation programmes, incubators and accelerators,

as well as M&A activities.

We are also seeing that banks want to leverage more fintech know-how and their front-end capabilities. Meanwhile fintechs want to leverage the banks’ vast customer bases, their infrastructure, and their stronghold on the financial regulatory systems.

The thing that is helping this the most are APIs. The banks want to revamp their core banking systems by enabling plug-and-play services offered by fintechs. So, we are seeing a lot of open platforms being built in different fintech sectors. As Medici’s Global Deep Dive report says, “This is seen as a natural step forward to embrace

the growing need for co-development, reusability, and agile/rapid application

development requirements.”

Banks also have lots of customer data, which is very valuable in an era ruled by Big Data and AI. Fintechs want to tap into this data and discover the actionable insights that will help their growth. There are some questions about who owns the data though.

Medici gives the example of Apple, which has managed to gather a lot of support from UK banks. This is because it has agreed not to hold onto to customer data. Although, with stronger data protection regulations such as GDPR in place, it will beinteresting to see how this situation pans out in the coming years.

The fintech sector started with the idea of disintermediating the incumbent banks’ service lines and adding a tech-driven customer experience to deliver innovative offerings. But it seems that the story has moved from ‘breaking the banks’ to ‘working with the banks’. As a result, the coming together of banks and fintechs has given a new direction to the strategic expansion of the financial services ecosystem, and in the coming years, we can expect the same trend to continue and take a more concrete shape. That seems to be the industry consensus.

How the neobanks tackle banking’s big problems

On September 24, 2019September 24, 2019 By mehranmuslimiblogIn Banks, FintechLeave a comment

Neobanks are having the same effect on banking, as quantum theory did on our ideas about reality, Medici suggests. Furthermore, digital banking has become a part of our everyday lives.

Stash CEO, Brendan Krieg, claims that his company has gained over 3 million customers since 2015. He says that the reasons as to why they have become so popular is that they’ve studied the consumer, and discovered that the average person wants to live a better financial life. Perhaps it is unsurprising that Stash’s average user is a 29-year-old who makes $50k a year, not a bad salary for a Millennial these days. But, success, Krieg suggests, is down to the fact that Stash’s app makes it easy for people to invest.

As Medici points out, the neobanks have gained their successes because they are meeting the customer where they are and are finding ways to connect advice, banking, and investing in one experience.

This applies not just to Stash: it’s a global phenomenon. The leading success factor for the major neobanks’ growth appears to be their superior customer experience compared to the traditional banks.

The redesigned mobile and web applications, and smooth customer onboarding, have enabled players like Monzo, Atom and Starling Bank to grow at speed.

Also, by eliminating costs associated with physical branch maintenance, neobanks are able to reduce the fees associated with key products.

However, while the customer experience seems to be the neobanks’ key selling point, there is another factor. They are solving the bigger issues with conventional banking.

For example, they are looking at innovative product offerings and improved customer service. Medici gives the example of Open, a neobank in India. It has integrated automated accounting and payment gateways with their current account offering. Furthermore, its platform enables startups and SMEs to integrate banking and accounting in one place using a multi-bank connect feature. And Open helps startups and SMEs to manage employee expenses in a seamless way.

Another example from India is InstantPay. It is focused on bridging a gap that traditional banks have not looked at since banks opened in India, and that is some time ago. InstantPay drives financial inclusion in a responsible and sustainable way and has reached 10,000+ PIN codes, and caters to 50 million unique customers.

Anish Achuthan, CEO of Open, said, “Most Startups & SMEs generally use multiple dashboards and interfaces for invoices, bookkeeping, and online payments. Making vendor payments and employee payouts have always been a challenge. All of this drains entrepreneurs and finance teams of their time & energy.”

Western neobanks have been successful largely because of the customer experience they offer, while in the Asia-Pacific markets the neobanks have to take a step further by answering core banking problems in the industry, such as like ‘knowledge transfer,’ ‘undocumented logic,’ ‘technical debt,’ and a ‘skills/desire gap’.

Mehran Muslimi

Tag: Fintech

Bank-fintech collaborations are the way forward

The 2019 outlook for banking

When banks partner with fintechs

How the neobanks tackle banking’s big problems