15 Dec 2021
There are still those who believe the traditional banking industry is going to be overrun by new competitors, be they bigtechs or – and this is the vested view of start-up founders – fintechs and other revolutionaries.
Yet, not unsurprisingly, recent history has demonstrated the incumbent industry is hardly standing still in the face of this threat and is evolving – albeit not as fast as many may wish – to assimilate the technologies, innovations and entrepreneurial spirit of the challengers.
"Banks are increasingly thinking of themselves as part of ecosystems where partnerships, JVs and other modes of cooperation deliver a broader, deeper engagement with customers.”
Sometimes this learning from the revolutionaries in the industry is not immediately obvious.
Take APIs – application programming interfaces – which are increasingly crucial in modern banking, particularly where “open banking” and the Cloud are concerned. Although decades old, the latest iterations of APIs underpin the offerings of many fintechs. In financial services, APIs really took off when they were mandated to facilitate open banking in Europe in 2018.
Open banking, by definition, also facilitates the entry of fintechs and other non-banks into financial services. Banks have paid attention.
According to a McKinsey & Co report, “banks increasingly rely on APIs internally to reduce costs and complexity associated with IT integration, freeing up change capacity by as much as 30 per cent”.
According to a 2020 McKinsey global survey on APIs in banking, roughly 75 percent of banking APIs are used for internal purposes.
“Nearly 20 per cent of banking APIs are used externally to support integration with business partners, including suppliers,” McKinsey said. “Banks also have plans to double the number of these APIs by 2025.
“Finally, 5 per cent of banking APIs are used externally to generate revenue. Banks plan to triple the number of these ‘public APIs’ by 2025. External APIs also support new business models, including orchestrating or participating in ecosystems.”
While the large scale adoption of APIs in banking, often via the vector of fintechs, is the result of a desire to respond to changing consumer demands, innovation, and cost pressures, the use of APIs to support new business models is going to be more significant in the long run.
Banks are increasingly thinking of themselves as part of ecosystems where partnerships, joint ventures and other modes of cooperation deliver a broader, deeper engagement with customers.
Significant role to play
The regulatory sector has the same view. A recent report from the Bank for International Settlements (BIS) found “the integration of technology, finance and services is rapidly changing the banking landscape, as big techs, fintech firms, non-bank financial institutions as well as incumbent banks take up stakes in virtual banking”.
The BIS, effectively the global banking regulator, accepts these forces are fundamentally changing the landscape and obviously bring threats as well as opportunity.
“New technology-driven models exploit the expanding data footprints of individuals and firms to generate information capital and reduce the reliance on collateral when offering loans and other financial services,” the BIS research found. “Data and entities that manage data will be at the heart of this transformation. Financial regulators thus need to ensure that regulatory oversight delivers on the inclusion and intermediation-enhancing benefits of digital finance without compromising traditional regulatory goals.”
This is the changing climate where fintechs are playing a significant role – sometimes as adversaries, sometimes as catalysts, but increasingly as partners, facilitators and co-innovators.
The always insightful digital banking commentator Chris Skinner makes the point very well:
“Many start-ups don’t understand banking; many banks don’t understand start-ups or, more clearly, technology and digitalisation. If the two can work together in partnership, then it’s a win-win. If they compete and fight, it’s a lose-lose,” he noted in a recent column.
“Most banks are struggling with digital transformation and fintechs can help them to transform; most fintechs are trying to help banks digitally transform by focusing on their processes and sub-processes, and using Open Banking and APIs to transform them. It’s not an adversarial relationship but a symbiotic one.”
I would make the further point though that start-ups and many fintechs aren’t created by entrepreneurs who get up each morning thinking “how can we help banks?” They get up thinking “there must be a better way; we can do that better than the incumbents; we can make this easier for customers”.
It’s genuinely part of the psychology of entrepreneurs – and it’s healthy – if they do believe they can revolutionise the system. Even if they end up being part of it.
That’s why it is encouraging to see more and more venture capital going into fintechs and other financial services start-ups. That guarantees the infusion of more and more innovation.
Off the charts
According to CB Insights, “fintech stole the show in 2021. Global fintech funding reached a record $US132 billion in 2021, more than two times the 2020 mark. To put that into perspective, $1 out of every $5 went to fintech last year”.
CB Insights’ State Of Fintech report found every major fintech category — from payments to insurtech — saw record funding in 2021, signalling the fintech boom is being driven by broad interest in the space.
The adjacent space of blockchain investment was one such area of broad interest. According to CB Insights’ State Of Blockchain report “funding in 2021 was off the charts”.
“Blockchain startups raised $US25.2 billion, driven by growing consumer and institutional demand for crypto (#wagmi?). That’s eight times more than the investment in 2020.”
This volume of funding guarantees transformation. And who knows, maybe in these thousands of start-ups there might actually be one that does render the incumbent financial services ecosystem a version of Jurassic Park.
More likely though, with history as a guide, we will see transformation via incumbents working with, learning from, acquiring or matching those start-ups.
When you look at how banks think about mergers and acquisitions today it is just as often about creating an entity, not always wholly owned, where what the start-up and the bank bring to the table are complementary. In being able to provide more products and services to a broader customer base, both the traditional institution and the start-up can grow.
This ability to partner and grow new ecosystems, while driving internal innovation and (relatively) simpler tech platforms, will be a major differentiator of the next generation of successful financial institutions.
Andrew Cornell is Managing Editor of bluenotes
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
15 Dec 2021
10 Nov 2021