I still hear a lot of rationalizations for why financial technology (fintech) won’t fundamentally change the banking industry. They range from “it’s all hype and no revenue” to “wait ‘til they get big enough for the regulators to go after them.” When fintech VC funding dropped off at the end of 2015, there was some relief from the traditional banks. Maybe a little air was going out of the fintech balloon? Despite that schadenfreude, there is a new realism in incumbent c-suites about the threat and opportunity posed by new entrants and the urgency of crafting an appropriate response. There is also increased maturity from many fintech players that maybe the banking industry can be revolutionized from the inside rather than being destroyed from outside the walls. Accenture’s 2016 FinTech Innovation Lab London, now in its fourth year, attracted applicants from a record 33 countries this year, and many of them already have strong revenue streams. Many of them also have a growing appreciation that the path to becoming a unicorn may lie in partnership with established players, not just competition.
From the incumbents’ perspective, there is still a mix of fear and envy about what can be achieved when you free banking from legacy systems, underutilized and costly physical distribution, and the quarterly demands of shareholders. But, there is also more intentionality in their approach. As Gandhi is reputed to have said, “First they ignore you, then they laugh at you, then they fight you, then you win.” The banks may have ignored fintech for a while, but over 1100 deals in 2015 with close to $20 billion of capital committed ($14Bn from VCs) has ensured that the banks aren’t laughing. Instead, the smart ones are asking questions of each new player in three areas. First, what is the nature of the disruption? Is it meaningful enough to move customers and overcome inertia? Second, what is the value at stake? Is the innovation putting tens of billions of dollars into play or is it a user experience tweak with little short-term economic impact? Thirdly – and this is the one that tends to get missed in most of the frothy commentary on fintech – how should I respond? Does my incumbent position confer advantages that I can exploit, or does it make me vulnerable? Based on that assessment, should I ignore, compete, collaborate or buy, and how is my answer shaped by broader regulatory and institutional issues that maybe the fintechs don’t have to deal with?
As banks answer these questions, different types of responses are emerging. Some are trying to emulate and compete hard to engage and delight customers, either in their core business or by incubating and protecting new digitally native businesses within their existing structures. Others are beginning to take a platform approach and are using APIs (Application Programming Interfaces) to allow third parties (and internal start-ups) to access all areas of the bank’s system, unbundle relevant services, and build new services based upon that platform. At least in Europe, some of that unbundling is going to be mandated by regulators, and trying to keep the drawbridge up won’t be an option. In parallel, many banks are hedging their bets by investing in fintech, either by providing venture capital or by developing mentoring and accelerator programs in the hope of gaining an information edge.
Despite this new intentionality, there is growing anxiety that Gandhi might be right after all. Of the senior banking executives Accenture recently polled who are involved in our FinTech Innovation Lab, only 60 percent felt that established players would survive and thrive in the digital future. The fact that 40 percent are now worried about the future of their institutions may be explained by the fact that over 70 percent of respondents felt that their bank has a fragmented or opportunistic strategy for dealing with digital innovation. When asked why their institutions weren’t responding to what, at least for some, appears to be an existential threat, four out of five respondents felt that when it came to culture and talent, they were only “somewhat” or “minimally” equipped for the digital age.
Fintech is here to stay and banks are losing their privileged and protected position in the economy. But despite increased pessimism, we are still at a point in the transition of financial services where the major banks control their own destiny. Maybe we will witness a true revolution that sweeps established names from the board, but it looks increasingly likely that better industry economics and magnetic customer experiences will result from an openness on the part of both the banks and the start-ups to work together.
For more perspectives on fintech, I invite you to:
- Read our full report, The Future of FinTech and Banking: Digitally Disrupted or Reimagined?
- Learn more about FinTech Innovation Lab