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When flying back from the Intesa San Paolo Fintech day in Milan, I was wondering what smart banks should do to outcompete their peers. The relationship between banks and fintech companies is still in its infancy.
By Philippe Gelis
On one side, banks are starting to understand that they will invariably face disruption in many banking sectors, affecting scores of their services and products in the near future. Conversely however, fintech companies usually need banking services or banking partners to be in business and grow.
Banks are facing the innovator dilemma: If they continue to do nothing while fintech continues to grow exponentially, without investing or partnering with the rising fintech tide, they will be more than noticeably affected soon. Creating or sponsoring fintech incubators can not be considered in the same bracket as fintech investment or partnership. Although, if they invest or partner, they fear to cannibalise their own business and revenue. The music, media and airline industries all faced the same dilemma years ago and reacted too late... with the outcomes we are all very familiar with. As it stands, banks as a group are not learning from the mistakes of other sectors in which the established figures did not change in time.
Nevertheless, managing the innovator dilemma is very different for a global bank than a small / medium-sized local bank, and surprisingly, the advantage is most likely on the smaller banks' side. Think about the following: The fintech space is becoming increasingly important but it is still very limited to some countries, such as the US (Lending Club, Prosper, On Deck, Dwolla, and Ripple, among others), or cities like London (Zopa, Funding Circle, Wonga, Marketinvoice, Transferwise, Kantox and many more). In these fintech "hotspots" the big disruptors are concentrated. So if you are a small / medium-sized local bank in countries like France, Germany, Spain, Italy or Holland, investing big in these fast-growing Fintech disruptors is a no-brainer for 6 reasons:
1. Low (or no) cannibalisation: you will not cannibalise your own business / revenue, at the very least, not in the short or medium term. Given that these disrupting fintech companies are mainly serving clients in the US or in the UK while you are serving clients in your own country means that you will be unaffected. Moreover, if you are a small / medium-sized bank, these disruptors will get more clients / market share from large banks than from you.
2. Access to generation X / Y: you will be serving clients from the X / Y generations, the ones that are particularly reluctant to visit branches and consider banks as outdated institutions. Another way of putting it is that you will become “cool” by offering state-of-the-art online services and providing great user experience, something that traditional banks have demonstrated that they are unable to do.
3. Cutting-edge technology: you will be involved in developing cutting-edge technology that your own bank IT team will probably never be able to develop. Even if they could, it would likely cost you much more in terms of capital and the technology would face such stiff competition that it may already be outdated by the time it comes on the market.
4. International expansion at low cost: you will start serving clients abroad without having to make the huge investments necessary for your bank to go international. And in the long run, you may also think about cross-selling your own products to the disruptor’s client portfolio to offer them an online one-stop-shop solution.
5. Big returns: think about the pure investment return, many fintech disruptors will become giants, known as “unicorns” in the tech industry (valuation > USD 1 Billion). Lending Club's IPO, for instance, should value the company at USD 3 to 4 Billion according to the press. So for a small / medium bank, that kind of return may have a big impact on the bottom line.
6. Opportunities to outcompete large banks: as an investor, you will almost certainly have the right of first refusal, in other words a right to buy the disrupting fintech company when a liquidity event occurs (commercial sale, IPO etc). This is a huge opportunity for you to push the disruptor solution in your local market and then outcompete your direct competitors, including large banks.
With only a fraction of the budgets dedicated by banks each year to the maintenance of outdated technologies, to the building of expensive facilities that add questionable value to their business or to create what are often perceived as generic, cliché advertising campaigns, they could buy all fintech disruptors, or at least invest in all of them in their early stages. Now the question is: “As a leading fintech disruptor, do we really want to be bought?" I don't think so ;-)
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