“We’re going to kill the banks,” was the line often pedaled by fintech startups in the past couple of years, while the banks were figuring out what to do in the wake of young companies attacking their business models.
That narrative has now changed.
At Money 2020 Europe in Copenhagen, the region’s biggest fintech event, major banks and upstart challengers came together. And instead of fighting with each other, the message was collaboration, and banks were much more honest about how innovation hasn’t always been fast.
“We are seeing now that even after so many years all the new companies are doing the stuff that we do in a better way with a superior value proposition and lower cost because you are leveraging new technology,” Carlos Torres Vila, chief executive of Spanish bank BBVA, said in a keynote speech on Monday.
“Customers are speaking with their feet, they are moving to new channels … They are clearly unsatisfied,” he added, admitting “our model is under disruption.”
‘Reality kicks in’
The banks recognize that there are a plethora of startups challenging different aspects of their businesses, from money transfers to lending. But the startups are also being a lot more honest—they can’t go it alone.
“I think it’s a natural evolution, you see it in the startup world where killing an industry is hard and people realize where the gaps are and fill in the gaps. People start out ambitious then reality kicks in,” Rob Kniaz, founding partner at London-based venture capital firm Hoxton Ventures, told CNBC by phone on Friday.
There are numerous examples of increasing collaboration. London-based TransferWise, the money transfer firm valued at $1 billion, has integrated its service into the smartphone app for LVH, Estonia’s largest bank. The Financial Times reported in December, that the startup is also in talks with other banks.
And, just this week, U.S. lending firm Kabbage partnered with Spanish bank Santander to provide loans for small and medium-sized businesses. These are just two examples of the many.
For startups, one of the attractions of working with a major bank is the expertise in areas such as regulation, which can often be costly and difficult for new companies to navigate. On top of these, integrating technology with existing banks can help startups to scale upwards.
‘Innovation from within’
And, the banks are increasingly becoming more open with their infrastructure as well as pursuing investments and acquisitions to essentially buy the technology.
BBVA acquired Simple in 2014, an app that helps users manage their money. It then hired Shamir Karkal, one of Simple’s co-founders, earlier this year to build an open application program interface, or API, for the bank. The idea would allow developers to build apps on top of BBVA’s technology. BBVA also recently invested $68 million in the U.K. challenger bank Atom.
Other major lenders are also in the space too, with the likes of Santander, JPMorgan, Barclays and ING, all working and acquiring with startups, a trend that’s set to continue.
“We’re doing innovation from within. We run our own innovation boot camp so we get a thousand new ideas every time we do one. But on the other side (there are) clearly a lot of good ideas outside as well so we see a lot of fintechs with useful propositions in order to improve the client experience and then clearly we do look for corporations and partnerships and that’s what we’re doing as well,” Ralph Hamers, CEO of Dutch bank ING, told CNBC in an interview on Wednesday.
Branches still key?
There’s a reason banks need to move quickly. The growth of fintech could see 1.7 million jobs slashed from European and U.S. banks in the next decade, according to a recent report from Citi.
In addition to startups going after different parts of a lender’s business model, there are also direct “challenger banks,” particularly in the U.K. These are often mobile-only offerings that have acquired or are in the process of acquiring a banking license.
One of these, in Tandem, claims that it’s doing something “the banks don’t do today”.
“The banks don’t help you manage your finance and that piece is where we are going,” Ricky Knox, CEO of Tandem, said during a panel discussion at Money 2020 on Wednesday.
Tandem, along with some of its peers such as U.K.-based Mondo and Germany’s Number 26, have apps that allow users to track spending and carry out cheap money transfers abroad. But the online-only model has been questioned, with one banking boss saying that branches will remain an important part of the business model.
Martin Blessing, the chief executive of Commerzbank, said that current services like telephone and internet banking could speed up, which would reduce the differentiating factor between new and traditional players, making branches a key part of winning customers.
“If we take the good part and offer those services fast enough then the service differential will be limited, and our ability to service people in branches will be a differentiating factor,” Blessing said, during the same panel discussion with Tandem’s Knox.
“I want to know where I can physically go when there’s a problem.”
Image Credit: CC by Mike Mozart