five°degrees was a sponsor of the Marketforce Future of Digital Banking conference in London on June 29/30 in London. On the stage, we outlined the five°degrees vision on Marketplace Banking.
five°degrees strongly believes in “the world of services”. A connected world where banks have core infrastructure to support the key functionalities they need, but for specific value adding services or products they connect to API’s of niche software vendors.
Fintech is hot
Fintech is still hot. Since 2010 more than $50 bn has been invested in the industry. Although there was a slight dip in Q4 2015, the Q1 2016 figures still show an increase of investments compared to the previous year.
In many countries such as the UK and Netherland, regulators are lowering the barriers to entry in the financial sector which has led to a stream of new Fintech companies starting up. five°degrees frequently visit Fintech events such as Finovate, Money 2020, Future of Digital Banking and each year we see new innovative Fintech companies emerging. Most of these new companies are established by entrepreneurs bringing extensive experience from established players in banking and technology. They identify a shortcoming at current providers and focus on improving one specific niche service or product.
Product and Services Fintechs
Fintech companies can be divided into two groups, Services Fintechs and Product Fintechs. Services Fintechs are the companies that that provide complementary services to banks. These companies have been around for quite some time having started with KYC and CDD services and nowadays extended with more data rich services like Personal Financial Management and big data services that can predict the behavior of the banks clients. Fintech companies can enrich the services that banks offer to their clients.
Product Fintechs on the other hand can be considered as competitors to established players. They deliver products that can replace the products that banks offer to their clients. Examples of these types of company are, robo-advice propositions, peer2peer lending platforms or SME Lending providers (alternative finance providers).
The product Fintechs have started to emerge in the last few years and they are already operating in the same space as existing banks. Disruption has already been introduced in many market segments, it might be naïve to think the banking industry will not be “uberized” one day.
five°degrees is a strong believer of the world of services where Banks connect to 3rd parties to enhance the products and services they can provide to their clients. We are already seeing the first phases of this world of services emerging. Banks are connecting to the Fintech eco system and investing heavily in innovation. The logical next step will be that banks also open up their own API’s and provide their services not only to other parties like banks, but also retailers or advisory firms. That is what we call marketplace banking. A connected world of different type of service providers in the financial industry that either take a role as product provider or distribution party, and these roles can even differ depending on the type of product.
Opportunity or Threat?
The big question for Banks now is: Should they see these Fintech companies as an opportunity or a threat? Banks currently face the challenge to stay relevant to their customers. This is caused by two important trends: customer expectation is increasing and customer loyalty is decreasing.
Customers demand more and more digital capabilities and servicing from their banks. If you get a single sign on google on all their products on any devices and you get it for free, then you are also expecting this from you bank. But banks still struggle with their legacy systems to keep up with modern technologies and deliver the agility that is needed nowadays.
On the other hand loyalty is decreasing. Switching has become so easy that clients will switch if banks cannot keep up with their demands. Aside from this, having multiple accounts at different FS providers is also easy by just accessing them through a single touch on the app on your phone.
Bank vs Fintech
Currently banks have the customers and the relationship and the Fintechs have the technology and agility that is needed to service customers.
Opinions differ when it comes down to seeing these Fintechs as an opportunity or a threat. We talked to some banks that feel that the product Fintechs have the advantage of operating in a less regulated environment, but will suffer the same challenges that banks have when they become successful and have to comply to more complex regulation and lose the agility too, so they don’t consider them as real threats. On the other hand, we also see banks setting up partnerships with Fintech companies and setting up Fintech boot camps to accelerate these developments. Banks like ING and BBVA are investing heavily in open infrastructures to enable and accelerate cooperation with the Fintech community.
Payment Service Directive
In 2018 Payment Service Directive 2 (PSD 2) regulation will become active. It obliges banks to share their client’s data through API’s, which opens up the gateway for new players that make use of the banks customer data. This will definitely have an accelerating effect on the concept of marketplace banking. Although banks nowadays have the clients and the client relationship, PSD 2 will provide other parties with access to that relationship.
When having the discussion whether Fintechs can be an opportunity or a threat, you shouldn’t think just in terms of individual Fintech providers. They can also join forces to attack the establishment. If you look at the total value chain of a retail bank, for every single step in there, there is a Fintech player supporting it. Imagine what can happen when Fintech companies join forces. We already see examples of these types of cooperation, like Number26, the German challenger bank that has joined forces with Fintech Transferwise for supporting cross border money transfers
How to face this challenge?
Threat or not, it is time for action to make sure Banks can stay relevant to their customers. Banks basically have two choices, keep up with Fintech developments by being a technology frontrunner themselves, or, if you don't want to spend huge budgets, join forces with the Fintech ecosystem.
The first option enables banks to create their own Fintech eco system. Some banks have set up their own agile development team to cope with the continuous changing demand of their customers. However, these developments require a lot of investments, and are therefore typically suited for the larger banks. Next to this, innovation is not just about technology. If agility is needed, you also need short decision lines and compliance and risk officers that think out of the box and in terms of opportunities. So also organizational transformation is needed to be and stay a technology frontrunner.
The alternative approach to cope with the innovation challenges is to fully embrace the Fintech eco system. Banks should invest in having an infrastructure that puts the client in the center, that allows them to have a single 360 degrees’ client view on products, processes, documents and communication. Add a workflow engine to this to automate processes and make sure to have an open architecture that allows you to easily couple and decouple 3rd party Fintech providers. The core functionalities like CRM, workflow management, document and communication management will always be needed in the future. It is the Fintech space providing KYC services, Personal Financial Management and many other services that we don’t even know of now that will drive innovation.
We don’t know what the future holds, but we do know you need the right application infrastructure to be ready to couple and decouple Fintech services that add value to your client proposition.