A Match Made in Banking Heaven: Big Banks and Fintech Startups

By Marc R Gagné MAPP Senior Privacy and Data Advocate, Cyber Intelligence and Director @ Gagne Legal. See more about Marc here.

Partnering for Success: Big Banks and Fintech Form a Perfect Synergie

How you embrace change can make all the difference in the world. That’s true in life but it’s especially true in business. Right now, there’s no sector feeling the effects of digital disruption more critically than that of banking.

There are currently around 12,000 fintech start-ups around the globe, with at over 2250 based in North America (1). What they’re up to amounts to no less than totally changing the way Canadians and the rest of the world do their banking.

From digital wallets to crowdfunding to robo-advisers, foreign exchange, and transaction management, there’s almost no aspect of banking that’s been left untouched by the digital revolution and the customer-centric focus it implies.

As a result, incumbent banks are quickly finding that the status quo no longer suffices.

Bad News for the Old, Familiar Stalwarts

When robo-advisers offer consumers a no-hassle, low-fee way to invest their money in a portfolio that’s balanced, tax-advantaged, and automatically adjusted to accommodate life changes, what’s to keep people from ditching traditional (human-powered) advisers?

And when borrowers can find easy access to credit on crowd-sourced digital platforms, why would they bother with traditional lenders?

Fintech upstarts are cornering the market in areas like peer-to-peer lending and algorithm-based portfolio management. However, in both cases, they’re serving a market that was previously under-served by the big, traditional banks: lower-income investors and people with bad credit.

But the digital prowess of companies like Lending Club and Betterment is spreading to other sectors that bite into the profits of the old banking stalwarts.

Consumers want easy, mobile-based payment apps. They want mobile access to their entire financial portfolios. They want their bank app to track spending for them. They want ways to pay their friends instantly from their phone. Banks who want to stay viable are investing in these areas and, by doing so, taking steps to survive in the digital era.

Banks who want to stay viable are investing in these areas and, by doing so, taking steps to survive in the digital era.

Fintech Upstarts Have Needs, Too

Don’t let the rapid rise of these digital technology-based finance companies (the ‘Ubers’ of finance) lead you to believe they’re invincible. As startups, they have a tremendous need for capital. Once fintechs have backing, they still have needs: authority in their sector, recognition, regulatory approval, help with compliance, and finally, a nod from the consumer sector in the form of great reviews.

Who better to fulfill those needs than the brick-and-mortar banks who have all those things in spades? Plus, the big players may be big and well-known, but they can benefit deeply from the technological advancements realised by their more agile baby cousins, the fintech start-ups.

Furthermore, there isn’t a big, established bank in the world that couldn’t use some new blood in the back offices, where innovation seems to have stifled in the past few decades. If revolution can’t come from within the ranks of banking’s top players, it should be allowed to enter from outside their hallowed, marble halls if they want to remain competitive.

Partnerships Made in Heaven

Bank of Nova Scotia is one such big player who’s making inroads with important fintech partnerships. They invested in U.S.-based Kabbage, an online lender focusing on the small business consumer.

Another online small business lender, Thinking Capital, has entered a partnership with brick-and-mortar giant Canadian Imperial Bank of Commerce (CIBC). Thinking Capital sends referrals to CIBC, thus fulfilling its need for large, regular influxes of cash.

JP Morgan partnered with a fintech company called On Deck Capital for faster loan approvals and faster funding to its SMB customers. Square, a well-known fintech mobile payment firm, is backed by big banking giants with names everyone recognizes: Goldman Sachs, Morgan Stanley, Citi Ventures, and JPMorgan Chase.

Spain’s Banco Santander is a huge fan of investing in fintech, with its banking fingers now reaching to several areas of the sector: payments, blockchain, regulatory software, lending, and wealth management.

Blockchain is a focal point for most European banks right now, as nearly all of them have invested in a blockchain firm (2).

But not all banks are adhering to the partnership approach when it comes to handling stiff competition from fintech start-ups. Some are choosing to handle their innovation in-house.

Some Big Banks are Going it Alone

Partnering with fintech makes sense, but some big banks are still choosing to modernise on their own terms. For example, CIBC now offers accounts with flexible fees based on the number of transactions made by the customer. TD has launched their own apps that allow real-time money management.

Japan’s Bank of Tokyo-Mitsubishi UFG is even developing its own digital currency (3). That’s on the heels of Citi’s “Citicoin”, another digital currency.

Bank of Montreal has also developed and launched some of their own digital services. One is called SmartFolio, which competes with upstart robo-advisers. SmartFolio isn’t exactly a traditional investing service, however, as it’s run from a digital platform and offered online.

Likewise, Royal Bank Canada has not only revamped its website to look more like a thoroughly modern online bank but has also launched a major initiative to represent their services on mobile devices.

But even RBC isn’t immune to the benefits of partnering with their pluckier fintech competitors. In addition to reimagining their existing banking procedures, they have launched new digital products and apps with help from upstart fintech players. These new apps include RBC Mobile and RBC Wallet.

Perfect Partnerships

For banks, the benefits of partnering with (or investing in) fintech start-ups are clear: staying competitive, achieving growth, and gaining entrance into new markets. Agile, customer-centric start-up environments also go a long way toward helping big banks’ ongoing problems with consumer trust. Strengthening customer relationships is an area where traditional financial institutions have been noticeably deficient.

And the benefits to the startups are crystal clear: much-needed infusions of capital, plus brand recognition, regulatory compliance, and growth of marketplace share.

Whether banks choose to invest, purchase, or grow their own in-house versions of modern banking apps and services, one thing is clear: digital disruption can be managed but it can’t be ignored.

Edited and prepared by Oscar Michel, Masters in Journalism, DCU

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