Take financial technology companies, “fintechs”. Just a few years back they were the wily, nimble, innovative little mammals about to take over the planet from the doomed dinosaurs of traditional banking.
"is a short-term correction in an otherwise long-term positive trajectory, as the industry’s fundamental growth drivers haven’t changed. The overall financial services industry is enormous and very profitable yet struggles with innovation and customer experience. - BCG”
Jamie Dimon, the chief executive of JP Morgan, the world’s most profitable bank, noted back in 2014 “when I go to Silicon Valley…they all want to eat our lunch. Every single one of (the fintechs) is going to try.”
That sense of threat lasted about two years before it dawned on people that while fintechs had great ideas and technology they lacked scale and capital and, perhaps most importantly, the trust of the broader community.
(Despite Australia, in particular, having a penchant for bank bashing, people trust banks to protect their money and privacy – even if they don’t like them.)
So fintechs started to partner with incumbents – an existential shift given added emphasis when it became clear there was another branch of the technology family that not only boasted innovation and agility but also had scale, capital and trust: “big tech”. Amazon, Apple, Tencent, Google, Microsoft et al.
Critically, those dinosaur banks are now coexisting more happily with fintechs because bigtechs are a threat to them too. It’s all too easy to imagine a traditional bank customer thinking “Google basically does everything for me why can’t it do my banking?”
Such is the threat – and opportunity – that nine out of 10 major global financial institutions (including ANZ) are actively pursuing new fintech partnerships to improve their offerings, according to new Finastra research.
This is a well-trod evolutionary path as one-time competitors come to recognise and exploit the competitive advantages both have. Fintechs can partner with banks to achieve scale, banks can harness the innovation of fintechs where they can’t match it themselves.
The Finastra research, conducted by East & Partners, finds the core motivations of global banks to integrate fintech solutions is reducing operational costs (46 per cent), deploying new technology with greater ease (43 per cent) and aligning more closely with evolving compliance needs (37 per cent).
When it comes to lending, survey respondents overwhelmingly viewed fintech partnerships as a vehicle to improve their offering – just a few years ago fintechs were seen as competitors.
Finastra Executive Vice President of Lending Isabel Fernandez noted the survey “demonstrated the recognition from financial institutions that they cannot navigate these waters alone. They are instead opting to partner with fintechs, with a preference for plugging into a platform of integrated fintech solutions, to help them to adapt quickly while reducing costs.”
The other driver for fintechs is the vastly different funding landscape compared with pre-2022. Once global interest rates started to rise, valuations of startups and even later stage fintechs began to fall as funding became more expensive and the risk-return trade-off for investors changed.
According to BCG, fintechs on average lost more than half their market value in 2022 – a plunge BCG believes “is a short-term correction in an otherwise long-term positive trajectory, as the industry’s fundamental growth drivers haven’t changed. The overall financial services industry is enormous and very profitable yet struggles with innovation and customer experience.”