“We’re going to kill the banks,” was the line often pedalled by fintech start-ups in the past couple of years, while the banks were figuring out what to do in the wake of young companies attacking their business model.
That narrative has now changed.
At Money 2020 Europe in Copenhagen, the region’s biggest fintech event, major banks and upstart challengers came together. And instead of fighting with each other, the message was collaboration, and banks were a lot more honest about how innovation hasn’t always been quick.
“We are seeing now that even after so many years all the new companies are doing the stuff that we do in a better way with a superior value proposition and lower cost because you are leveraging new technology,” Carlos Torres Vila, chief executive of Spanish bank BBVA, said in a keynote speech on Monday.
“Customers are speaking with their feet, they are moving to new channels … They are clearly unsatisfied,” he added, admitting that “our model is under disruption”.
‘Reality kicks in’
The banks recognize that there are a plethora of start-ups challenging different aspects of their business from money transfers to lending. But the start-ups are also being a lot more honest – they can’t go it alone.
“I think it’s a natural evolution, you see it in the start-up world where killing an industry is hard and people realize where the gaps are and fill in the gaps. People start out ambitious then reality kicks in,” Rob Kniaz, founding partner at London-based venture capital firm Hoxton Ventures, told CNBC by phone on Friday.
There are numerous examples of increasing collaboration. London-based TransferWise, the money transfer firm valued at $1 billion, has integrated its service into the smartphone app for LVH, Estonia’s largest bank. The Financial Times, reported in December, that the start-up is also in talks with other banks.
And just this week U.S. lending firm Kabbage partnered with Spanish bank Santander to provide loans for small-and-medium-sized businesses. These are just two examples among many.
For start-ups, one of the attractions of working with a major bank is the expertise in areas such as regulation, which can often be costly and difficult for new companies to navigate. On top of these, integrating technology with existing banks could help start-ups to scale upwards.
‘Innovation from within’
And the banks are increasingly becoming more open with their infrastructure as well as pursuing investments and acquisitions to essentially buy the technology.
BBVA acquired Simple in 2014, an app that helps users manage their money. It then hired Shamir Karkal, one of Simple’s co-founders, earlier this year to build an open application program interface, or API, for the bank. The idea would allow developers to build apps on top of BBVA’s technology. BBVA also recently invested $68 million in U.K. challenger bank Atom.
Other major lenders are also in the space too, with the likes of Santander, JPMorgan, Barclays and ING, all working and acquiring with start-ups, a trend that’s set to continue.
“We’re doing innovation from within. We run our own innovation bootcamp so we get a thousand new ideas every time we do one. But on the other side (there are) clearly a lot of good ideas outside as well so we see a lot of fintechs with useful propositions in order to improve the client experience and then clearly we do look for corporations and partnerships and that’s what we’re doing as well,” Ralph Hamer, CEO of Duthc bank ING, told CNBC in an interview on Wednesday.
Branches still key?
There’s a reason banks need to move quickly. The growth of fintech could see 1.7 million jobs slashed from European and U.S. banks in the next decade, according to a recent report from Citi.
As well as start-ups going after different parts of a lender’s business model, there’s also direct “challenger banks”, particularly in the U.K. These are often mobile-only offerings that have acquired or are in the process of getting a banking license.
One of these in Tandem, which claims that it’s doing something “the banks don’t do today”.
“The banks don’t help you manage your finance and that piece is where we are going,” Ricky Knox, CEO of Tandem, said during a panel discussion at Money 2020 on Wednesday.
Tandem as well as many of its peers including U.K.-based Mondo and Germany’s Number 26, have apps that allow users to track spending and carry out cheap money transfers abroad. But the online-only modelhas been questioned, with one banking boss saying that branches will remain an important part of the business model.
Martin Blessing, the chief executive of Commerzbank, said that current services including telephone and internet banking could be sped up, which would reduce the differentiating factor between new and traditional players, making branches a key part of winning customers.
“If we take the good part and offer those services fast enough then the service differential will be limited, and our ability to service people in branches will be a differentiating factor,” Blessing said, during the same panel discussion with Tandem’s Knox.
“I want to know where I can physically go when there’s a problem.”