To say that the banking industry is reluctant to change is an understatement at best; the industry has been shrouded in mystery for decades, with banks doing their best to keep clients in the dark. All of this changed though with the 2008 recession and the rising popularity of the FinTech industry that came to transform the banking world by digitizing it, increasing transparency, and make it more user-friendly.
To the dismay of many banks, the FinTech industry succeeded in doing what it set out to do – disrupting the financial industry. In fact, FinTech companies succeeded so well that a recent report by PwC determined that the banking institutions can expect to lose over 24% of their revenue to FinTech companies within the next 3-5 years.
Not eager to accept a drastic decline in revenue and risk layoffs and restructuring, more and more financial institutions have turned to FinTech companies in order to collaborate on new technologies. So much so that 82% of the executives polled by PwC reported that they expect to work with FinTech startups in the future in order to improve their digital capabilities and retain their competitive edge.
How Co-opetition with FinTech Companies Helps Banks
The most important thing to remember about co-opetition is that it is more than collaboration – it is creating a situation that is mutually beneficial by growing the available market and increasing the demand. In the banking world, collaboration has traditionally been viewed with suspicion, with collaborators seeking to gain an advantage at the expense of their partners.
Banks today have several challenges they need to overcome in order to retain relevance, namely the integration of technology, modernization of customer perception, and creation of unique differentiating factors. Fortunately for banks, FinTech companies are able to help them on all of those fronts, and all they are asking for is a bite of the pie.
With FinTechs and banks, co-opetition almost seems like the obvious solution, since the FinTech companies have the technologically savvy, financially smarter, and user-friendly solutions, while the banks have access to critical masses and large-scale infrastructures to scale solutions.
Technology and Transparency
As one can infer from the name “FinTech,” the modernization of the financial industry relies largely on the integration of technology in the financial space. For banks, integration of technology, particularly in a way that promotes transparency, poses many challenges, particularly because many still rely on antiquated legacy systems that are unable to communicate with the outside world, and replacing those systems is perceived as costly and daunting.
Co-opetition between financial institutions and FinTech companies can give banks adaptable and technologically modern capabilities without the need to develop the innovations on their own. More so, the unique way in which FinTech companies approach financial problems make their solutions more likely to be cost effective and utilize modern digital channels, thus potentially increasing the profit in an industry where profit margins are routinely cut due to competition.
Catering to the Customer
The FinTech industry sprang up because the financial industry wasn’t giving the clients what they needed, and individuals sought creative ways to fill those needs. One of the desires of banking customers was more modern and transparent customer support, and as a result, FinTech companies offer solutions that place a great deal of importance on the customer experience, user-friendliness, access to information and transparency. The traditional banking system, which seemed to scare and confuse clients for years, often seems to cater to themselves rather than the clients.
Co-opetition between banks and FinTech companies can improve the customer experience while bringing the unique strengths of the FinTech company (usually the technology, interface, and understanding of client needs) to the massive audiences of the banks.
Establishing a Differentiation
Integration of technology and catering to clients is soon going to be a given in the eyes of consumers, and therefore in the services of banks. What is not so obvious is the differentiator that will make individuals and companies choose one bank over another – and this is where co-opetition between banks and FinTech companies can yield the best results. Since FinTech companies by nature create adaptable and dynamic technologies, they have the ability to quickly change their solution and expand on it the moment the need arises or the technology becomes available – something the banks seek but lack the ability to integrate.
When banks and FinTech companies engage in co-opetition, they are able to increase customer loyalty and even offer catered solutions and services that are at an added (transparent) cost, creating a win-win-win for the FinTech companies, the banks, and the clients.
The Proof is in the Pudding: Co-opetitions Work
Saying that banks should view FinTech companies as true partners is one thing, however, engaging in co-opetition with a FinTech company is another. Despite the hardships, there are banks and large institutions looking to stay one step ahead of the game by integrating innovations through co-opetition with FinTech companies. While many still call their co-opetitions PoC’s or collaborations, the fact that the collaborations strengthen the position of both parties and help both grow rather than sees one advance at the expense of the other, is what makes it a true co-opetition.
Brian Hartzer, CEO of Westpac, the oldest bank in Australia, is one example of a bank actively seeking to collaborate with FinTech startups and run PoC’s to find a new and innovative solution that offers Westpac the competitive advantage it has upheld for over 200 years. The advantage FinTech startups have over banks is clear to Hartzer who said “we get to see a lot of things, and also we can have ideas that we want to pursue, but recognizes that, being a big company, we will never be able to do it ourselves”.
In China, the Hong Kong Monetary Authority (HKMA) is embracing innovation by launching a large scale PoC that utilizes blockchain and distributed ledger technology in order to improve financial transactions and improve the efficiency and transparency of trading, and Spanish banking powerhouse BBVA continues their quest to modernize their institution by purchasing FinTech companies such as Simple (for $117 million) and Holvi (for an estimated $100 million).
The moves these institutions are making all show that the future of the financial industry lies in the ability of banks and large financial institutions to work together with FinTech startups – whether they call it PoC’s, collaboration or co-opetition is up to them – all we care about is seeing a win-win-win situation for startups, banks and clients.