Wisdom says, "If you cannot defeat your enemy, become his friend." According to some recent studies, traditional financial service providers should take this advice to heart when it comes to dealing with fintechs. Fintechs, that is start-ups and more-established companies that create better, faster, and cheaper financial services using modern technologies have been a threat to classical banks and insurance companies with their complex, inflexible, and cost intensive structures for quite some time already.
There are an estimated 5,000 to 6,000 fintechs worldwide providing various types of services ranging from mobile payments, investments, financing, insurance, and advisory to asset management. According to an Accenture study, in the first quarter of 2016 alone some 5.3 billion dollars were invested in fintech ventures worldwide—an increase of 67 % over the same period last year. In Europe and Asia fintech investments have almost doubled reaching 62 %.
But whereas disruptive fintechs have been predominant in the past directly competing with incumbent organizations for customers and market shares, there is now a new reverse trend emerging: cooperative fintechs, which offer solutions to enhance the position of existing market players. Such B2B partnerships allow banks and insurance companies to retain control of customer relationships—a decisive advantage. In addition, the collaboration with fintechs provides them with new opportunities with regards to better cost control, capital allocation, profit generation as well as customer acquisition, loyalty, and perception making them more competitive.
“The structure of the fintech industry is changing and […] a new spirit of cooperation between fintechs and incumbents is developing,“ write the authors of a recently published McKinsey study which examined more than 3,000 fintechs worldwide. They found that the share of newly launched fintechs with B2B offerings has increased worldwide from 34 % in 2011 to 47 % in 2015.
This is in line with the results of the Accenture study cited earlier, according to which investments into cooperative fintech startups have increased by 138 % last year, now representing 44 % of all fintech investments, up from 29 % last year. The regional differences, however, were quite significant. While in North America collaborative fintech investments climbed up from 40 % in 2011 to 60 % in 2015, in Europe the opposite trend could be observed, where disruptive fintech investments increased from 62 % to 86 %. “The proportion of competitive fintech ventures in Europe and Asia is much higher than in North America, which largely reflects the earlier stages of maturity of fintech markets, particularly outside of London,” explains Julian Skan, fintech expert at Accenture. However, with increasing maturity level of the local fintech markets, the proportion of collaborative fintechs as well as the degree of collaboration with traditional financial service providers via investments, acquisitions, and alliances will likely increase.
Another interesting finding of the Accenture study is that although the share of cooperative fintechs has increased significantly, bank participation in fintech deals is rather low. Last year banks participated in less than 10 % of all reported fintech deals, totaling less than $5 billion dollars. Very little compared to the $50 billion these banks spent on new technology investment during the same period.
Nevertheless, the studies clearly show that the willingness to cooperate is increasing on both sides. This is particularly true for the highly regulated and very capital-intensive area of corporate and investment banking (CIB) which accounts for 15 % of all fintech activity across markets. According to the McKinsey study, only 21 % of CIB fintechs are seeking to disintermediate the client relationship. And less than 12 % are truly trying to disrupt existing business models by using new technologies.
Given the large number of fintechs and the high complexity and costs of cooperation, the core strategic challenge for incumbent organizations is to choose the right fintech partners and cooperation models enabling them to derive real added value for their customers and remain relevant in the long-term.