The fintech revolution is here and fintechs are being squeezed

ANZ’s announcement of a long-awaited joint venture with Apple to offer Apple Pay, and one for Android Pay looming, brings the relationship between established banks and financial technology companies – fintechs – to the fore.

" Some disruptors may well replace incumbents but most partner with them."
Andrew Cornell, BlueNotes managing editor

Banks have long had open relationships with fintechs – consider the payment schemes Visa, MasterCard and American Express. In wholesale banking, more than 10,000 banks globally use SWIFT, a fintech which sets standards and enables secure financial communication.

But as a World Economic Forum communique noted, it “is the novel application of technology and its speed of evolution that make the current wave of innovation unlike any we have seen before in financial services”.

Fintechs are more likely to be considered start-ups, disrupters, disintermediator, but the reality is those – tiny few – who go on to be successful will do so because they become part of the established financial order.

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Some may well replace incumbents but most partner with them. There’s long been debate about whether non-banks – be they tech giants or retailers or pure brands like Virgin – will take over banking.

To date, even when organisations have toyed with this idea, either by applying for their own banking licences or buying smaller banks, they have not persevered. 

The most notable example is General Electric’s complete withdrawal from financial services.

Before the financial crisis, GE Capital was the world’s largest non-bank financial company, focusing on consumer finance, credit cards, insurance and commercial leasing. The business grew out of the enormous demands on GE’s treasury from its multitude of industrial businesses.

That treasury in turn became a distinct financial institution. But the crisis fractured the model: rather than a huge profit generator in its own right and supporter of the industrial business, GE Capital lost billions on sub-prime mortgages and cost the parent its prized credit rating. The final straw came when banking regulators officially deemed GE Capital globally systemically significant, adding an extra layer of regulatory costs and capital. 


There’s an age-old debate about the enterprise benefits of conglomerate structures versus more pure play businesses – diversification versus specialisation – but GE ultimately decided the downside of banking exceeded the synergy and profit benefits.

A similar story has emerged with technology companies in the US (including Microsoft) and Japan (Sony) and retailers in the UK (Tesco) among many others.

There’s a flipside too: while banks like Mellon, Morgan Stanley and Macquarie Group have built up less volatile funds management and retirement businesses, few banks have made a success of the conglomerate model known as bancassurance or allfinanz where a bank also own insurance and wealth management businesses.

The argument many would make is the cultural challenges, different regulatory regimes, economies of scale and capital requirements mean banks are not in fact natural owners of wealth businesses.

In the week Apple announced its first joint venture in Australia with a major bank, the tech icon also reported its first quarterly earnings slump in 13 years as the run of blockbuster, high value new products slowed.

Meanwhile, the highly innovative but highly specialised British company Dyson launched another successful product, a hairdryer. The Financial Times’ John Gapper wrote a very intriguing column on what Apple might learn from the much smaller Dyson.

Some is unlearnable – Dyson is still run by its charismatic founder Sir James Dyson while Steve Jobs is dead – and some arguments others might dispute. But Gapper’s central point is Dyson has stuck to doing what it does well: digital electric motors which drive hand-dryers, fans and vacuum cleaners, while constantly innovating around the edge, moving into new lines like hairdryers.

Apple, meanwhile, has built its value but also its challenges by constantly shifting into new businesses: music players, phones, watches. This is tough. New moves into self-driving cars and televisions appear to be on hold. Apple may yet become more a subscription service built around iTunes than a manufacturer but in many ways it faces similar challenges to banks wanting to diversify or non-banks wanting to enter banking.

As ANZ’s chief executive Shayne Elliott said at the launch of Apple Pay, in the increasingly digital and disrupted modern financial services system, partnerships make sense. They make sense he might have added because partnerships merge the benefits of conglomerates and specialists, allowing organisations from one industry to utilise the innovation, customer base and scale from another.

This is true even where the partnership is of a large company and a start-up. Large companies bring scale, customer bases, risk management, capital and administration.

Speaking of the fintech payments revolution, Saikat Chaudhuri, director of Wharton Business School’s Mack Institute for Innovation Management, says “it’s not just an alternate payment channel, it’s that we’re allowing other entities in the system to act as banks. The way that it would have to proceed, is that some of these big online properties and social media would really need to almost apply for a banking license. I’m not sure the regulators, after what happened in the financial crisis, would allow for that”.


One of the current fintech hotspots is the so-called “blockchain” idea of distributed ledgers which promise the ability to bypass expensive central clearing and settling systems. But as Morgan Stanley has argued there is bad news for the blockchain firms with business models centred on a T+0 settlement timeframe (real time), noting that the reason this won't happen is not technological but regulatory.

Incumbents are already regulated.

Start-ups do however bring energy, innovation, flexible working structures and left-field ideas.

The assimilation process is well advanced. Wharton Business School noted “in 2015, investment in private fintech companies rose nearly 60 per cent more, to $US19 billion” with both Bank of America and JP Morgan Chase spent $US3 billion each on technology initiatives and investments.

Incumbent banks are – or should be – responding to classic threat analysis. Encyclopedia Britannica, Kodak and the traditional media are all case studies of what happens when someone comes up with a simpler and cheaper way to satisfy the needs of your customers. Banks can’t simply assume the incumbency and high barriers to entry which have provided value in the past will persist.

For fintechs and their investors, the challenge is chasing the growing pool of venture capital funding – in an environment where the numbers seeking that funding are growing even faster.

As online newssheet Quartz noted “late last year everything changed. Financing for start-ups fell 29 per cent in the fourth quarter of 2015 from the third quarter, and it dropped another 8 per cent for the first three months of this year. The birth rate for new unicorns (start-ups which grow to be worth $US1 billion) also fell precipitously. Start-ups began scrambling to get their finances in order. Layoffs mounted, perks vanished. For consumers, prices started to rise.”

Meanwhile, the more incumbents, successful start-ups and tech giants come together, the more the opportunity for other disruptors shrinks. Ben Graham from PIVOTL makes this crucial point.

“With major tech brands such as Apple, Samsung and Google’s Android, as well as PayPal, all competing for space in the mobile payments space it seems the chance start-ups have of fighting their way in and gaining any kind of meaningful traction is now almost non-existent,” he wrote.

“However, beyond mobile wallets the payments space is more competitive than ever and with funding drying up it will be more difficult for start-ups to disrupt any part of the process.”

The digital revolution is certainly gathering pace but as with any revolution it seems the victors will have formed numerous alliances, even with those once considered – or still considered – rivals.

Andrew Cornell is managing editor at BlueNotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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