FinTech and Banks – friends or foes?
During the last few years, companies in the FinTech sector have been consolidating their position as leaders in the digital disruption of the financial industry. For many, their strongly technological core and the innovation behind their solutions pose a fatal threat to traditional banking. For others, the success of FinTech companies will depend on their collaboration with traditional financial institutions as strategic partners during all stages of their digital transformation.
Considering both perspectives, it is inevitable to ask ourselves a few questions concerning the impact of FinTech companies over traditional banking, and the role of banks in the development of financial services based on technology. Will both be able to co-exist in harmony? Is there a real threat for banks? Is collaboration going to be the only hope for success for businesses in the FinTech sector?
The PSD2 Directive opens up new opportunities for FinTech companies in Europe
In January 2018, the European Union implemented PSD2 (Revised Payment Service Directive), a new regulation that will allow companies to connect with banks’ API in order to develop new financial services without the need to invest in heavy banking infrastructure.
With this Directive, the European Union aims to open up more opportunities for new competitors on the market, encouraging competition with the purpose of stimulating the development of faster, more affordable, and more accessible services for users.
The changes introduced by the Directive, among with the advances towards the concept of Open Banking, open up new collaboration opportunities between FinTech and banks. And although a lot of time will probably pass until the effects of the new regulation start to take place in the long run, the efforts of the European Union towards the creation of a single European ecosystem collectively point to the possibility of a harmonic co-existence between both protagonists in the financial industry.
Do FinTech companies pose a threat to banks?
The Financial Technology sector is undoubtedly on the rise: according to CBInsights, VC-backed FinTech companies raised more than $5.4 billion across 323 deals globally only in the first quarter of 2018, with over 26 companies reaching a Startup Unicon valuation (Check out my latest article on Revolut becoming the latest unicorn in the FinTech sector).
However, despite the immense growth of FinTech companies and the pressure that they exert on financial institutions, it seems highly unlikely that they will destroy traditional banking. On one hand, the Financial Technology sector is still quite small; if FinTech companies operate in billions of dollars, banks make operations in trillions, and have a higher capacity to achieve economies of scale. On another hand, practically all financial services depend on bank accounts to be able to function.
Even so, it is evident that the threat is existent and quite strong, mainly because financially-technological services are generally capable of responding better to the needs of the customers than traditional banking.
Will FinTech companies be able to survive without collaboration with banks?
According to an article of the Digital Journal based on the World FinTech Report 2018 of CapGemini, FinTech companies will be unable to survive without collaborating with traditional banks to provide a stable infrastructure that responds adequately to the changing needs of consumers.
As the same report states, the services developed by both FinTech companies and banks are rather complementary than mutually exclusive, considering the fact that they provide different layers of value to end-consumers. The driving force of newly emerged companies in the sector is based on their capacity to develop agile and innovative solutions with technology as their main focus.
On another hand, bank infrastructure, access to capital, and regulatory ability provide a competitive advantage for banks, which allows them to develop economies of scale that are difficult to replicate by other companies in the sector.
With the implementation of the new banking directive PSD2 this year, it seems evident that, at least in the European market, the main focus will be encouraging the collaboration between FinTech and banks via open APIs that make the development of new services over an existent banking infrastructure possible.
However, the FinTech sector is still in the phase of continuous growth, and there will be many more questions to answer before reaching conclusions of any extreme. Until now, these startups have managed to capture a huge and ever-growing market share globally, without depending heavily on traditional banking.
So what stops them from continuing their growth the same way they started it?