Assessing the competition between Banks and Fintech

You can find as many articles announcing the rise of Fintech and end of banks as the ones predicting that banks will remain and take over Fintech.
It is not even clear for the people involved, as Fintech executives are more confident about banks’ future than banks themselves, as shown by this Economist survey:

To better understand what is happening, let’s review the strengths and weaknesses of the competitors along these dimensions: Security, Culture, Regulation, Offering and Resources.

1) Security: advantage Banks in the short-term, tie in the long-term

Trust: Banks in the short-term, tie in the long-term
Banks reputation has been seriously damaged since the 2008 crisis and more recently following various scandals (libor scandal, embargo violation, etc.). Yet in most countries deposits are (at least partially) backed by governments, and most people still prefer to give their money to well-established firms with a long history of banking rather than start-ups. Fintech will reach this level of trust only in the long-term.

Cyber/data security: advantage Fintech
In theory, banks can dedicate much more resources to security, but they are more targeted by attackers (more money…) and their IT landscape is a complex mix of old and new technologies very difficult to secure entirely. Fintech are relatively easier to protect as they use a limited set of technology and offer a limited number of services. It will become more difficult as they grow in the future.

Risk management: advantage Banks
It is part of Banks’ DNA to manage risks. Over time they have developed thorough risk policies and processes. In the long-term they will remain better armed than Fintech in this area.

2) Culture: advantage Fintech in the short-term, tie in the long-term

Innovation: advantage Fintech in the short-term
Fintech are more innovative by nature! Banks try to push innovation, but innovation teams are struggling in matrix organizations with all-powerful business line managers that usually stick to what they are best at: making profits the “traditional” way. Few leaders are ready to push for the cannibalization of their own business. In the long-term, millennials will become banks’ leaders, introducing a more tech-savvy spirit within executive committees.

Banking expertise: tie
Of course banks have more expertise (decades of experience) on dealing the most specific and complex products with the most demanding clients. But from my experience, many Fintech comprise expert (ex)bankers in their team/board. You need to know how the current system works in order to break it. Fintech are perfectly able to propose innovative solutions for the most widely used financials services.

Technology expertise: tie
The pool of talented engineers is large enough. Banks attract talents with good salary packages and other “corporate” advantages. But you find also very talented people in start-ups with a more entrepreneurship spirit.

3) Regulation: Fintech in the short-term, Banks in the long-term

In recent years, regulators have greatly increased the regulation for the traditional banking industry, and have been giving huge fines to banks that were not following the rules. Hence banks have focused their attention and money on how to adapt to the new processing, reporting and capital requirements.
Fintech have taken advantage of this situation to flourish, funded by venture capital.
But in the long-term, regulation will turn against Fintech. As they grow in size, regulators will want to better control the new entrants by issuing new policies. One example: do you think the governments of all countries will soon abandon their sovereignty on their monetary policy and embrace a transnational digital currency such as bitcoin? I don’t. Actually many regulators start trying to control bitcoin.

4) Offering: advantage Fintech in the short-term, tie in the long-term

Customer experience: advantage Fintech
No comment. In the long-term we can expect Banks to catch up through acquisitions, partnerships and cultural change (see supra).

Branding/marketing: tie
To say the least, banks do not top brand rankings. They are the least loved brands by millennials, and even though 7 of the 10 biggest companies in the world are banks, you cannot find a single one in Forbes top 20 of the most powerful brands.
As a customer myself I feel that Fintech develop a much more innovative marketing (one example is Transferwise). Even though they cannot compete with banks in terms of budget/reach, they compensate with an efficient word of mouth and use of social media to reach out to hundreds of thousands of potential customers. But it takes time to build a brand.

Pricing: advantage Fintech
Over time banks have created fees for every possible banking action. Some have become unacceptable in our digital age. For instance, sending money is just a transfer of information between accounting books, there is no reason why it should not be like sending an email: free and immediate.
Also due to a complex legacy, banks prices lack transparency.
Fintech on the contrary offer cheap and transparent prices.

Integration: advantage Banks
Traditional banks offer a full stack of banking services. This is an advantage compared to the situation where you need to use 20 different apps offering 20 specific financial services (NFC payments, remittance, PFM, etc.). Some “rebundling” would be expected in this area.

5) Resources/Assets: Banks in the short-term, Fintech(?) in the long-term

Customer base: advantage Banks
Banks still have much larger customer bases than Fintech. But they are slowly losing ground. And the financial inclusion of the millions of unbanked people could change the balance of power, as flexible Fintech could be better armed to win this battle.

Capital: advantage Banks
Obviously banks own the capital. This a huge advantage in this leverage-based industry. But they can also use it to acquire the most promising Fintech before they become too much of a threat (e.g. Simple).

IT Legacy: advantage Fintech
The complex IT landscape inherited from years of growth and mergers is obviously a heavy burden for banks.

Physical network: tie in the short-term, advantage Fintech in the long-term
Branches and offices are costly for banks. But many customers still want to have face-to-face meetings when it comes to money management (esp. for complex demands). Well-designed premises can actually be decisive assets.
In the long-term, we will probably have video meetings with our advisors / bankers and won’t need ATMs, so banks will have to do something about their real-estate.

Summary & conclusion

The Banks vs Fintech competition seems to be a closely-fought match.
Banks currently own the market and still make significant profits, so Fintech will have to fight hard to capture market share.

Speed is key for Fintech success: they need to acquire a large customer base, financial footprint and build a brand very quickly. Else they will be acquired by banks before they can reach a critical mass. Actually, not all Fintech want to become unicorns, many of them intend to launch a successful business only to sell it to banks!

Banks will succeed if they become truly innovative (willing to cannibalize their own businesses), improve the customer experience (to win the customer relationship) and reduce the burden of their legacy.

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