October 2017

Change is afoot. Banks and financial technology companies are becoming partners in collaboration and some banks have started to acquire stakes in the dynamic sector that has challenged the status quo in recent years. Neil Fredrik Jensen discusses the growing appetite for blissful union

Global business will always keep evolving, creating new models, making others redundant and opening up new possibilities. The successful companies in corporate history have helped drive evolution, while others have become victims of shifting sands. The banking industry has been confronted with the prospect of existential change in the past few years, with the spectre of the much-discussed fintechs sending some bankers into something of a tailspin.

But the mood is now very different. Banks who were, initially, in denial that fintechs posed a challenge to their long-standing, and largely unquestioned, approach to financial services are now embracing the idea that they need to rethink their models. They are now aware there is another way to serve their customers.

At the same time, fintechs have recognised that banks, despite some of their shortcomings, have the clients, the relationships and the long history of being at the heart of the financial system. While in the past, the chutzpah of the fintechs made bankers feel uneasy, the two sides have exchanged olive branches and are finding ways to work together and, ultimately, form mutually reinforcing partnerships.

The tipping point

If the fintechs wanted to disrupt the old order and challenge the status quo, they certainly succeeded. But clients still place a lot of faith in the banks, despite a system that has creaked at the seams. That may frustrate some provocateurs, who felt that they could steal the lunch of the banks, but in the post-crisis environment people have not left banks in their droves. That said, research by DeNovo1 suggests that 30% of consumers are considering using non-traditional financial service providers.

Banks do realise that we may be at a tipping point, though. In a recent survey by PwC,2 around 88% of legacy banking organisations said they were concerned about losing revenues to financial technology companies, notably in areas such as payments, lending and money transfers. Market watchers anticipate that up to a quarter of current revenues could be at risk – that’s a substantial chunk of business.

So, how have banks reacted to this news? According to the PwC survey, 50% of financial services firms worldwide plan to acquire fintech startups over the next five years. Many see this as a logical move given the increasing digitalisation of the banking industry. At Money2020 in Copenhagen earlier this year, bankers were talking with excitement of a new phase for the industry. Barclays UK’s CEO, Ashok Vaswani, enthused about the way his bank was being transformed, while Barclays’ former CEO insisted that, after a period in which banks threw people and resources at technology projects, clients were now demanding genuine transformation of the banking world.

The developing trend

Deutsche Bank is one of a number of banks kick-starting a trend that looks set to snowball, forging links with fintechs. On 4 April, it announced the acquisition of a 12.5% share interest in the receivables auction platform TrustBills.

CEO Jörg Hörster explains that the company’s goal is to become the definitive receivables marketplace for companies of all shapes and sizes. “Deutsche Bank, as one of the top trade finance banks in the world, adds credibility and gravitas to TrustBills. It also shows that the bank is looking far into the future, which bodes well for its digital transformation and its commitment to fintech partnerships,” says Hörster.

TrustBills represents Deutsche Bank’s first material foray into the fintech market and is recognition that digitalisation will impact all areas of business. Daniel Schmand, global head of Trade Finance at Deutsche Bank, acknowledges the part that technology will play in the future landscape. “Our investment in TrustBills very much plays to our strategy and we quickly identified that their offering is very complementary to our own trade finance operation.”

If that sounds like a ‘nice fit’, then it also mirrors what’s happening across the industry. Any tie-up between banks and fintechs has to tick many boxes, notably tech and market compatibility as well as brand suitability and, equally important, common ground from a cultural perspective.

The first two elements are relatively easy to overcome. Some banks have struggled with their technology, although this is less to do with a lack of financial commitment and more attributable to the number of repairs and patches they have undertaken down the decades. Conversely, technology is a core strength for fintechs, so this provides a very good reason for breaking bread together. Likewise, market compatibility should be relatively easy to achieve, given both banks and fintechs are working in the same sphere of business. By identifying areas that could benefit from the fintech ethos of ‘solutions for the underserved’, banks can partner with creative new arrivals that can help them realise untapped potential in a specific market.

"The winners of this age of disruptors could be the banks with the best fintech portfolios"

Joerg Hoerster, TrustBills


Challenges

Bringing together brands and cultures could be more challenging, but these things are not insurmountable. Essentially, banks are aware they have to move on from a world where they had a captive audience – any thoughts of complacency have certainly been consigned to the past. Fintech people are undoubtedly different from the staid image of the banker perched behind his or her desk. However, bankers have been defecting to the fintech industry for some time, so crossover is already taking place. Furthermore, a new generation of bankers from all corners of the world, inspired by technology, globalisation and socio-economic changes, is coming through the ranks.

While the brands of a bank and a precocious fintech may appear to be unlikely stable-mates at first glance, they can both offer each other significant benefits. Banks gain from the technology savvy and agility of the fintech and they, in turn, offer their partners the chance to grow their brand faster and deeper than if they were alone.

Michael Spiegel, Deutsche Bank’s Head of Cash Management and Germany Country Head, Global Transaction Banking, believes that the wave of partnerships, joint ventures and collaboration has only just started. “I have said for a while that we are approaching an inflection point and the current trend of bank-fintech partnerships is indicative of this. Ultimately, we have a common goal and that is to provide a better service for our clients. Bringing together the expertise of banks that have been operating for many, many years, with the fresh thinking and innovation of the fintechs is a win-win situation for everyone, but mostly for the customer.”

TrustBills’ Hörster sums up how the fintech-bank dynamic could play out in the coming years. “It is perfectly feasible that the banks we consider to be the real winners when we come through this period of acute disruption will be the ones that have the strongest and most effective fintech portfolios. That’s how important this trend could be for the sector.”

Neil Fredrik Jensen is a freelance financial journalist and former Co-Editor of Deutsche Bank’s flow magazine


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Sources:

1 DeNovo Fintech Focus, A La Carte Banking: Fintech’s largest threat to bank profits, March 2017
2 PricewaterhouseCoopers LLP, Redrawing the Lines: Fintech’s growing influence on financial services, April 2017

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