Banks and fintech companies need to collaborate to succeed, argue Saxo Bank’s global COO, Søren Kyhl,andStig Tørnes, head of business management. And that requires a change of mindset on both sides, the sooner the better.
Fintech has become the buzzword for a diverse group of companies whose ambition is to bring efficiency to financial services through innovation. The prevailing argument for the proponents of fintech has so far been that the industry has the potential to challenge and eventually replace traditional financial services companies.
Fintech firms perceive banks as being burdened by legacy technology and focused on complying with post-crisis regulations rather than meeting the needs of the clients via digitalisation. Banks, on the other hand, argue that fintech companies lack the trust of the end customers due to the fact that they are broadly unregulated; they also claim that fintech companies lack the ability to scale their offering due to use of immature and relatively unproven technology.
The truth is perhaps somewhere in between. Far from a “winner takes it all” scenario, the future of the financial ecosystem will see fintech companies and banks retain their competitive advantages if they acknowledge that their future interests are more likely to converge than not.
To understand where this convergence is likely to take place, it is worth considering where fintech companies and banks have their respective strongest competitive advantages.
For fintech companies, the freedom to use the most modern technology available to build user friendly client interfaces is arguably their core strength. Because fintech companies do not own the underlying infrastructure, their mission is to make the user experience better than that available via banks rather than to protect existing services which rely on legacy infrastructure (e.g. branches). Fintech companies have also proven to be better at extracting valuable customer insight from big data to offer a better service and make quick decisions (e.g. in the lending space).
Banks, on the other hand, still retain a few competitive advantages despite the growing challenges stemming from regulatory pressures on capital, and the fast pace of technology which makes it hard for them to stay ahead in the innovation game. They already have long lasting relationships with their clients, they are regulated, and they have deep insights into the global financial infrastructure. The latter is important because, if you are to provide financial services in the full sense, you need to understand the existing financial infrastructure to be able to tap into it and/or act as a gateway to it.
If the fintech firms’ strength is the banks’ weakness, and vice-versa, then smart banks and fintech firms will look to leverage each other’s competitive advantage to preserve their value within the chain and survive and build scale within the financial ecosystem.
Traditionally, banks have been able to defended the customer interface by controlling the entire value chain and the total technology stack supporting the value chain.