The fintech-big bank relationship is often depicted as a David-versus-Goliath story. This is wrong, says Lloyds’ Ravi Bhalla, the startups are not here to fell big banks, but to work with them. Mohamed Dabo reports.
This “young destroyers” misconception notably comes with two others, according to Bhalla, head of Group Design at Lloyds banking group: big banks are dinosaurs and fintechs are new kids on the block.
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“Many fintechs profess to have been operating in this space long before the term ‘fintech’ came around and became a globally used moniker.”
He pointed to the advent of ATMs in the 1960s and the development of the industry-wide SWIFT payment infrastructure collaboration in the 1970s—two examples, among countless others, showing fintechs are no spring chickens.
In any case, “the pace of change we’re experiencing is simply frightening,” he says.
It can be summed up neatly in a shift in architectural patterns, he says. From that of traditional monolithic-product-silos structures, with separate systems and data sets, to a target architecture state.
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By GlobalData“The latter is free of technical debt, built on cloud infrastructure and APIs as its foundation.”
Three notable fintech trends
Three major trends have captured Bhalla’s attention:
The first is fintech’s exploitation of open banking. “For example, through Revolut’s partnership with TrueLayer, customers can see all their accounts and budget in on place.”
The second trend is big tech’s partnerships with established banks. “Amazon and Goldman Sachs, through the use of Amazon’s lending platform.”
Another example is Lloyds banking group’s recent partnership with Google, “utilising Google’s cloud platforms as a strategic tool to increase engineering capability, AI, and machine learning.”
The thirdly is the rise of neobanks. “The top 2 neobanks in particular, Revolut and Monzo, have seen tremendous outgrowth recently,” he says. “Whilst at the same time, we’ve seen the outgrowth of establish banks decline.”
This last trend, he says, is largely fuelled by the tech-savvy behaviour of millennials.
The fintech investment level
In the UK alone, investment figures have doubled between 2017 and 2019, Bhalla notes. Global fintech investments have increased 30% over the last five years. Much of this has been driven by M&A and PE activity.
“Recently in the UK, Resolute was able to secure $500’s worth of funding, which has made them the most valuable fintech in the UK, trebling their value.”
However, there are still a number of challenges for fintechs. Many of them still have to turn a profit.
“The UK’s regulatory environment is poorly supportive of innovation and development, via the FDA’s sandbox,” Bhalla says.
In 2014, the Financial Conduct Authority (FCA) launched its “Innovate” programme to support firms developing the innovative products and services of the future.
This resulted in the creation of sandbox, aimed at allowing businesses to test innovative propositions in the market, with real consumers.
“Only 4 out of 10 receive any further investment post the FCA’s sandbox activity.”
Partnership with fintechs
“There’s an increasing appetite for established banks to acquire fintech firms,” Bhalla says.
These ventures present both opportunities and challenges.
Opportunities
With is the underlying rationale for banks to partner with fintechs?
For starters, “the opportunity to challenge your own business model.”
Fintechs also give banks the chance to enhance their customer experience. “Adopting a user-centred design approach can help drive customer loyalty, richer user experience, and greater levels of trust.”
The startups bring increased agility and adaptability. “This can accelerate the execution of minimum viable propositions which are much more effective in tailoring to changing customer’s needs.”
The ability to transform culture through innovation. “It also gives an opportunity to shift more towards a societal focus, given the increased regulatory importance placed on areas such as customer vulnerability and sustainability.”
Fintechs, of course, represent investment opportunity. “An investment opportunity that brings with it cost reduction as well as faster, easier, and cheaper solutions.”
Challenges
Great as partnering with, or acquiring, a fintech could potentially be for a bank, there needs to be some conditions for the collaboration to bear fruits.
“Both organisations should have a certain level of technical, cultural, and strategic fit to make the partnership work smoothly.”
Bhalla has decerned certain characteristics that are common to successful fintech partnerships:
“Having a shared understanding of the problem statement. Shared vison, values, goals, and risk. As well as the appetite for all parties to share those features.”
What is the true impact of technology on the business? “A clear end-to-end framework with a clear understanding of the impact of technology, the architectural components and the integration levels required to across the organisation.”
Success often calls for a plug-and-play business model. This a ready-made business model which is already set up and selling products or services. “Developing a plug-and-play model to leverage multi-player capability to optimise and scale offerings.”
There’s little doubt that banks are now seeing financial technology companies as allies, not enemies.
In recent years, the financial industry has seen fast-growing adoption of financial technology. Banks and venture capital funds have made sizeable investments in fintech, reflecting their expectations for substantial change in the industry.
When David and Goliath work together, the customer is the ultimate winner.
