- 90% of banks surveyed have set up a fintech strategy and only 10% banks are in “wait and watch" mode
- Strategic approaches of banks vary from collaboration, innovation partnership to futuristic equity investment in fintech
- 64% of surveyed banks are making active generic investments in developing the fintech community and building partnerships with them; only 33% plan to invest in fintechs
Fintech companies are reshaping the financial services industry by bringing disintermediation and novel solutions that address inherent inefficiencies while changing customer expectations.
Earlier considered as competitors, these fintechs are rapidly taking on the role of partners and enablers as they facilitate financial institutions to use technology more effectively, optimise resources and expand service offerings.
Evolving fintech strategies of banks
The combination of banks and fintech can produce a convergent institution that is better equipped to compete with pure technology platforms. Banks burdened with legacy systems are increasingly opening their doors for greater collaboration with fintechs to improve customer experience and expand their digital reach. It often results in a win-win synergy by providing that much-required scale in customer access to fintech.
A survey by The Asian Banker across 30 financial institutions in Asia Pacific and the Middle East in 2019 showed that 90% of the surveyed banks have set up their fintech strategies, while only 10% banks are in the “wait and watch” mode. A significant 64% of the surveyed banks are making active generic investments in fintech towards developing the community and building better engagement, including innovation labs, co-creating space, hackathons among others. On the other hand, only 33% of the banks are considering equity investments in fintech and an even smaller 29% plan to develop a fintech startup.
There is notable change in the way banks now perceive and embrace fintech. Banks are rapidly adopting new technologies and building commercial collaborations with fintechs in order to provide faster and innovative solutions with speed. Rather than develop solutions inhouse from scratch, pro-active banks are now looking into building a fintech ecosystem to meet their objectives faster. Bank-fintech partnerships are becoming more common but the approaches to this sort of alliance vary with each institution’s strategic focus and operational challenges. Not every partnership fits the mould, rather banks have multiple approaches in parallel.
Partnerships and collaboration approach: Cognisant of the evolving landscape and threats, most banks in Asia Pacific focus on commercial partnerships with fintech companies that can provide solutions to unique problems and meet specific business and operational needs. Building successful commercial relationships with fintechs, however, hinges on their adaptability to develop fast approvals and integration with agile fintechs, as well as sync their culture towards adoption of rapid innovation.
Banks can provide the financial solutions and infrastructure that enable them to co-create together or scale their business models. For instance, Standard Chartered is working with the following: blockchain company Ripple, Airwallex in Australia towards international payments, and with China’s digital payment platform Alipay. The bank also has innovation lab eXellator and SC Ventures.
Pro-active banks are building ecosystems through increased collaboration leveraging application programming interface (API) technologies. For instance, DBS bank now has 350 APIs to integrate with partners for developing an ecosystem of services. The bank is conducting a global hackathons that have attracted over 1,000 participants across 25 markets towards building new cutting-edge services for its customers. ICICI Bank in India has implemented over 200 active third party APIs .
Meanwhile, selected banks such as China Merchants Bank, Commercial Bank of Australia, DBS Bank, OCBC Bank, China Citic Bank, etc., have set up innovation labs that facilitate the identification of right fintech solutions, co-creation of solutions as well as building an innovative culture within the organisation. OCBC Bank’s innovation lab, ‘The Open Vault’ for example, implemented a home renovation loan chatbot solution and a machine learning-based anti-money laundering solution in partnership with two fintechs. Kotak Mahindra Bank in India developed a payment co-creation program for its ecosystem of collaboration along with UPI 2.0 Hackathon, which facilitated it to identify fintech companies.
Investment approach: A key route to future proof themselves, as well as to have access to innovative technology, has been to take equity position in fintech companies either through venture capital (VC) or direct investments. The US banks such as Citibank, JP Morgan Chase and Goldman Sacs, have been the most active investors, going by the investment in a number of fintech companies.
In the first half of 2019, US banks participated in 24 equity deals with fintech companies, according to research firm CB Insights. This follows a record-breaking 2018, wherein US banks backed 45 equity deals with fintech startups, a 180% increase from 2017. It also reported that the overall total fintech funding, totalling to $24.6 billion by end of the third quarter in 2019, has already surpassed the total in 2017. However, the number of deals is expected to fall short of 2018’s record. The total corporate venture capital deals by banks and other financial services firms have surged 500% from 2014 through the third quarter of 2019. Investments by financial service firms into startups hit a record-high 329 deals worth $8 billion in 2019. Nearly half of that deal activity came from banks.
Among the leading bank investors in APAC, Commonwealth Bank of Australia invested $100 million in Klarna – a “buy one and pay later” company – and in R3, a blockchain company, and a few others. UOB invested in a few AI and machine learning companies, as well as in the accelerator program, Finlab. Westpac Bank has committed $150 million to ‘Reinventure’ fund which has already made 29 investments in fintech companies and adjoining areas. The bank also partnered with payment companies like Square, Stripe to bring new services to its business clients. Siam Commercial Bank has set up fintech investment arm Digital Venture with $100 million capital, one of the largest in Thailand, and focuses on emerging technologies.
In other regions, BBVA invested in Simple, Atom Bank, Holvi and Solaris, plus $250 million in Propel Venture Partners and $50 million in a Chinese VC. Societe Generale became the first French Bank to acquire a fintech bank in 2015 and has set up a $165.28 million (EUR 150 million) fund dedicated to innovation.
Banks have escalated their internal investments into technology to compete while actively exploring multiple models of fintech engagement, collaboration and investment to have a stronger future growth. However, these banks will have to redesign their processes towards an agile and faster embedding of innovation. They also need to rebuild their culture to embrace innovations by starting to think out of the box like a fintech company.