Banking and Fintech: Why Coopetition Will Pay Off

McKinsey estimates that fintech competition and banking digitization could jeopardize 10% to 40% of bank revenues by 2025. Fintech firms are rapidly strengthening their market position. Over the past 5 years, they have raised about $23 billion of capital globally. In 2014 alone, they secured $12.2 billion, report McKinsey and CB Insights. According to the Economist Intelligence Unit (EIU), 54% of senior bankers and 59% of fintech executives think that banks underestimate the fintech challenge. 3 of the top 6 competitive weaknesses of banks named by the bankers are related to digitization: a lack of a clear digital strategy (49%), legacy technology constraints (35%) and attracting / retaining tech talent (33%). These weaknesses correspond to a few fintech competitive strengths mentioned by the fintech executives: the absence of legacy systems (33%), capacity to innovate (31%), technology expertise (27%) as well as scalable and flexible technology (21%). It is easy to see that banks will undergo digitization more smoothly and thus secure their revenues if they establish closer cooperation with fintech firms, dubbed coopetition.

Brian Buckingham, Vice President of Deposits at Nomis Solutions, a provider of pricing and profitability management services for financial firms, observes that one of the biggest challenges banks and credit unions are facing today is a rise of the overbanked, financially literate and tech-savvy customers who have accounts at 3 or more banks and successfully manage their finances across all online banking platforms. They are not loyal bank customers: they can easily switch to services or products of a competitor if they get a better offer. A 2014 Bain & Company report on customer loyalty in retail banking shows that on average 28% of customers in developed countries and 47% of customers in developing countries made a purchase at a bank other than their primary bank.

“Developing a holistic understanding of emerging banking segments like the overbanked will become a critical differentiator in the ongoing fight for customers. […] It is time for banks to put their expansive data resources to use in pushing forward a prioritization of the customer experience,” claims Buckingham. However, banks will not be able to fully utilize their customers’ data if they continue using technology systems from the 1970s or 1980s. It is very likely that they will struggle to provide high-quality digital banking services, preferred by the overbanked. The problem can be solved using fintech expertise and resources.

Falguni Desai, Managing Director of Innovation & New Ventures at Future Asia Ventures, stresses the interdependence of bank and fintech business models. Fintech firms are trying to unbundle bank services and redesign them to increase their efficiency. For example, they are using new technology to create more user-friendly platforms. Developing new solutions would not be possible without bank investments. Desai notes that many strategic investors in fintech startups are the largest US banks. “As fintech startups grow and expand to new regions and target consumers, the relationships with banks and the benefits afforded to them from partnering with a large institution are bound to materialize,” he says. In addition, some fintech solutions can be adapted to banks’ needs.

Jim Marous, a financial industry strategist, observes that banks and fintech firms have started realizing the benefits of coopetition. They complement each other: banks have a solid customer base, experience in dealing with risks and regulations, a broad product portfolio, customer trust and a lot of capital, while fintech firms have modern operating systems, technology expertise as well as the ability to innovate and develop narrow solutions. If their strengths are combined together, it will be much easier to provide innovative and satisfactory products and services for customers.

Although 95% of bankers and fintech executives surveyed by the Economist Intelligence Unit (EIU) think that banks will still dominate retail banking, fintech companies will increase their shares in every product category over time. They will strengthen their market position by taking away the best bank customers with lower fee offers. “The problem is likely to grow as tech-savvy millennials, who have little loyalty to banks, begin to take larger shares of financial assets,” the EIU warns. In its opinion, banks and fintech firms can peacefully coexist if they “integrate the technology back office”. This will help fully utilize the fintech potential for innovation and bank assets and to make combined offers in a shorter time span.

In its recent white paper, Deutsche Bank promotes the idea of strategic partnerships between banks and fintech firms in the business-to-business (B2B) payments sector. It argues that banks can better withstand the increasing competition of innovative fintech startups and digital payment ecosystems if they decide to work together on products or services with better value to customers. In order to succeed, both sides need to combine their core competences and choose the best work format: a dual-brand service, white label deals or integration. There is a good chance that such partnerships can take the lead in the digitization of B2B payments, Deutsche Bank concludes.


References:  [1] Jim Marous, The Financial Brand (I) / [2] Economist Intelligence Unit via Jim Marous, The Financial Brand (II) / [3] Brian Buckingham, The Financial Brand / [4] Bain & Company / [5] Falguni Desai, Forbes / [6] Deutsche Bank via Finextra