Can traditional banks and fintech start-ups actually work together?
3 May 2016
The rise of digital challenger banks would appear inversely proportionate to the fall of the incumbents, if the latest news is anything to go by.
App-only Atom Bank finally launched last month, while digital competitor Tandem announced its giveaway of free shares in exchange for becoming a co-founder.
This is all after the release of Citigroup’s ‘Digital Disruption’ report predicting that the inexorable growth of the fintech industry as a whole would see the incumbent banks across the US and Europe shed nearly two million jobs. Barclays CEO Antony Jenkins has even predicted that digital disruption could collapse profitability by over 60%.
While it seems there is no avoiding the death of the bank as we know it, it is evident that the evolution of old banks will require embracing one or both of the following: go digital or die, and collaborate rather than compete. But can traditional banks and fintech start-ups genuinely co-operate?
Goliath inviting David in
For some banks, these two points are central pillars of the future proofing they are already investing in. Spanish bank BBVA took a stake in Atom last year. Citigroup has launched Citi Fintech, its own initiative for a mobile-centric business model. And Barclays has signed a proof of concept agreement with Swedish bitcoin exchange Safello.
This comes after Deutsche Bank used its ‘Fintech 2.0’ whitepaper in February to call for banks to partner with fintech and digital currency businesses or risk disappearing altogether.
As Citigroup’s report points out, start-ups may have the advantage of new innovation, but incumbents have the upper hand regarding scale, resources, customer bases and brand heritage – assets which may take a challenger years to amass.
The collaboration with start-ups that Deutsche Bank is pursuing could be the future proofing strategy that both sides of the ecosystem are striving to lock down. Big banks get the innovation and tech savviness they are desperate for, while start-ups can access the scale, resources and security that may otherwise hamper their growth. Not to mention having access to world class corporate services like HR and legal to help them better navigate the potential minefields of recruitment and regulation.
So are incumbents and challengers simply both sides of the same coin when it comes to the future of banking, supplementing each others’ weaknesses and complementing each others’ strengths? Deutsche Bank would certainly have you believe so, with MD Rhomaios Ram telling the media following the ‘Fintech 2.0’ whitepaper launch that start ups seem ‘very keen’ on potential partnerships.
But – and despite Deutsche Bank’s optimism, this is a big but – this happy ending of David and Goliath joining forces to making banking better relies on one crucial factor: a mutual agreement.
Deutsche Bank and its counterparts will need to rely on the willingness of digital challengers to partner with the very old guard they deemed broken enough to fight back against. Partnering with them may in fact go against their initial mission statement and overall beliefs. Can you imagine Richard Branson accepting a partnership with BA in his early Virgin Atlantic days?
Perhaps the conditions required for this shift will be the biggest challenge for both sides of the banking ecosystem, new and old. If challenger banks don’t buy into the beneficial picture Deutsche Bank is painting, it and others like it will need to rethink their future proofing strategy – so Citigroup’s dystopian forecast does not end up a reality.