Fintech and banking, a complex mix between challengers and enablers

Incredible but true: bank CEOs are talking more about Fintech than we are. Digital transformation, banking of the future… Every one gives it a different label, but, ultimately all of them want to say the same thing: they are destined to embrace the principles of Fintech.

The CEO of JP Morgan, James Dimon, expressed certainty a few months ago that Silicon Valley was on the march. “There are hundreds of new companies, with big ideas and sufficient funding to work on alternatives to traditional banking”, he acknowledged, and, instead of limiting its impact, he promised to work hard to improve their own services, to the extent where they can be as competitive as those offered by Fintech. At least, recognition on behalf of banks… but it is not the only one.

Francisco González, Chairman of BBVA, sees focussing on financial services from a digital perspective essential, given that “pressure from technological advances will be the main factor driving the consolidation of the finance sector”. Change is not a choice, as “those who don’t change, will be left behind”, he asserts. On that much we can agree!

So, what role does Fintech have in this paradigm shift? It is more complex than it may seem at first glance, but we could separate Fintech companies into two categories:

‘Challengers’: These are companies which are attacking head-on the main business areas of the traditional banks, focussing on specific business verticals and offering customers a solution with high-level added value and benefits which are evident from the onset. Loans, financing, currencies or payments are some of the verticals in which the challengers are gaining market share from banks. The consultancy McKinsey estimates that, in five of the main business lines in retail banking, between 20 and 60% of profits could be at risk. The consultancy signals that Fintechs are starting to undermine banking incomes and that “the digital revolution is underway and regulation will have a significant impact on the banking economy and its business models”. But let me share a phrase with you that I prefer: “Fintechs are disrupting banks’ relationships with their customers and represent a significant threat to their incomes”. I like it!

“Enablers”: They are those ‘enabling’ companies, generating opportunities through new products, new solutions or opening up new markets, for example. We are talking about big data, or other factors that could make the cake to be shared out even bigger. Instead of being a threat, they can represent an opportunity if banks are capable of getting involved in their projects in the short term, either directly or via  investment in Fintech companies.

The bankers’ dilemma: how to maintain or increase profits while challengers are eroding their revenue base?

In this area, banks see an opportunity to ride the Fintech wave, but sincerely, I believe that by their nature, they will only do so in the most superficial way. The success of the Fintech industry is not merely down to the application of technology to improve the user’s experience; what is really harming banking is the competence of a sector with its principal objective as user satisfaction.

Banking is far off change of this nature, it continues to still be focussed on increasing profits to the detriment of customers, being in mind that banks’ commission rates have been considered as abusive by the EU. Everything signals that their sudden interest in Fintech is nothing more than cosmetic.

The real reason is that the challengers are undermining their incomes, which means they need to compensate this loss of business, taking advantage of the new opportunities provided by enablers, but are taking a long time to materialise. How do they subscribe to this strategy when the main objective of a banking CEO is to defend its value on the stock exchange in the short term to get his juicy bonus?

Many banks are being aggressive with the challengers, their rivals, to protect the flow of income coming from customers, who until now, they have cheated with tricks and opaque services. On the other hand, we find some entities which are very friendly – and not unselfishly- with the enablers, taking advantage of the momentum to create new sources of income. We find examples with open APIs or big data.

In truth, I think that bank CEOs are sufficiently clever – and results-orientated- to be able to understand that the only way to compensate the loss of income they are experiencing and will continue to experience from the appearance of disruptive and more competitive products and services is by forging alliances with their, until now, rivals. Is it possible to unite Fintech with banks? That’s anyone’s guess.