November 23, 2020
In the early days of fintech, much of the narrative focused on competition. New nimble players were going to upend incumbents who had been around for decades and in some cases, centuries. The Davids would defeat the Goliaths. The conversation moved on long ago towards collaboration, more the Davids and Goliaths join forces.
The collaboration is evolving at speed. Incumbents are partners for market solutions and making capital investments in fintechs at the same time. Goliath is now actively helping David succeed and in doing so, sharing in the success and ultimately becoming even stronger. COVID-19 may even be accelerating the evolution of this newfound relationship and helping incumbents see first-hand what an asset a new and nimble fintech partner can be in a crisis.
Historically, banks have relied on an oligopoly of traditional enterprise vendors and implementation partners with project timelines of years. The legacy IT systems and spaghetti code of large incumbents suit these vendors as it keeps their bank customers locked in, unable to ever sunset old systems and stuck paying recurring license fees. However, the extraordinary circumstances brought about by the pandemic and the rapid policy response by governments around the world to counter it, has forced banks to react with somewhat surprising resourcefulness and agility when it comes to digital transformation.
Research released by Marqueta last month revealed that 89 percent of European banks feel the pandemic has drastically increased the speed of change in the banking sector from years to months, with digital transformation projects needing to be delivered in two-thirds of the time. This trend of banks moving towards an ecosystem approach to banking infrastructure had already begun before the pandemic hit but has been accelerated in recent months, and it is some of the world’s largest banks who are leading the charge, and making capital injections along the way. We’ve seen several examples this year.
In July, Deutsche Bank announced an investment in German fintech, Traxpay, a company that will integrate supply chain financing technologies and solutions within Deutsche’s own offering. Commenting on the news, Daniel Schmand, global head of Trade Finance and Lending at Deutsche, said: “Recent developments we’ve seen as a result of COVID-19 show how important liquidity is for our clients. With Traxpay we have an experienced partner with a good track record.”
Would this partnership have happened without COVID-19? Probably. Would it have happened as quickly as it did, and would an investment also have been included? Possibly not.
Last week, the Australia and New Zealand Banking Group (ANZ) made an undisclosed investment in Auckland-based fintech, Aider, to help SMEs get data-driven insights into their cash flow, staffing and accounting. Commenting on the partnership, CEO and Founder of Aider, Brendan Roberts said: “Together, Aider and ANZ will innovate solutions that address SME cash flow problems and enhance the relationships businesses have with their advisors.”
SMBC also announced last week that it has deployed OakNorth’s Credit Intelligence software to further enhance its commercial lending proposition in the US and Asia and optimize its asset review processes. In addition to this partnership, it’s also made a strategic investment in the business via a $30m secondary share purchase. Jonathan Awad, who helped lead the partnership said, “The commercial lending industry is at a seminal moment and the banks that can embrace data and digital in new and creative ways are the ones who are going to win out in the future. This year has demonstrated just how quickly things can change, so being able to monitor and re-run credit analysis on an ongoing basis, rather than annually or bi-annually, is a game changer for getting a grip on your portfolio.”
We have seen incumbents from all around the world investing in fintechs whose tech they’re also deploying, Goldman Sachs and Bud, Lloyds and Thought Machine, Westpac and 10X Future Technologies, but what’s changed this year as a direct result of the pandemic, is the speed at which this is taking place. According to research from CB Insights, U.S. banks have already made 40 investments in fintech companies this year despite economic uncertainty surrounding COVID-19.
It is a smart strategy for both parties. In addition to the future financial gains the bank may incur as a result of its investment, it also gets VIP access to the latest developments and new product releases from the fintech. The fintech meanwhile benefits from a strategic partner who will be delivering business volume and a capital injection and be taking a longer-term view of the partnership.
It’s a complete 180-degree change from a few years ago when banks were worrying about fintechs stealing their market share, and sweating them in POC projects, to today where they’re actually incentivized to help make these fintechs’ propositions even more compelling.
For fintech firms this means a change in emphasis going forward: rather than attempting to disrupt incumbents there is a unique opportunity to partner with and potentially obtain investment from them. Fintechs must be prepared to prove their value very quickly, so the focus should be on deep vertical expertise that can be deployed rapidly in a variety of environments, rather than broad capabilities that take a long time to integrate with other systems.
Having open APIs and the ability to play a part in a diverse ecosystem of providers is an absolute requirement. Plays with "Mechanical Turk" solutions which paper over missing functionality with services will battle to scale rapidly enough and most likely struggle to meet the insatiable demand from multiple client banks.
Business is always keen to see quick results, and this has rarely been the case with banks and enterprise software providers which are often very expensive, and resource and time consuming to implement. Many incumbents have a newfound agility in fintech partnerships to expand revenue lines and capacity, so much so, they are doubling down with a capital investment into the fintech. This could be the beginning of a beautiful double dip.
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