On their own, start-up fintechs find it a challenge to compete with traditional banks; but by teaming up with technology giants they could beat the banks at their own game.

While top banks like Citi, Goldman Sachs and Barclays are leading the field when it comes to investing in and incubating fintechs, they are being joined by tech giants like Google, Apple, Amazon.

Tech giants, experienced in dealing with start-ups, can leverage new innovative ideas and apps from fintechs to become competitors to banks. Plus, fintechs may find working with tech giants more appealing as they are technology focused, innovative, open, agile, and can provide the scale and customer base required to shape & grow a solution.

In my previous blog I discussed how the relative strengths and weakness of banks and fintechs are driving them towards each other.  Indeed, a partnership with a bank or a tech giant is an essential ingredient for scaling and industrializing fintech solutions. 

This is also important for the sustainability of the fintech as a business, if that is its ambition. Not all fintechs consider banks as that sustainable partner, mainly because tech giants are more in the forefront of digital innovation. The ability to bridge the gap between the physical world and the digital world is starting to determine the effectiveness of any new solution and tech giants are already pioneers in this space.

The financial crisis lowered the risk appetite of banks with obvious increases in regulation and compliance monitoring. It may have contributed to banks being less innovative in terms of keeping up with the growth in technology and digitalization. Tech giants, on the other hand, have enjoyed accelerated growth in recent years being very innovative, streamlining and disrupting various industries including telecommunications, logistics, travel, e-commerce, etc. Inevitably, they are also entering – or have already entered - the finance sector.

Tech giants like Apple, Google & Amazon have a broader and much larger customer base than banks as they offer services across multiple verticals worldwide. They have embedded themselves into cultures and communities. The have exploited the rise in smartphone usage to influence peoples’ daily lives with innovative services.  These days you are not compelled to take your wallet with you when you go out of the house; a smartphone with Apple Pay or Android Pay is just as good as carrying a wallet.  In a way smartphones are wallet, bank, high street and information services together - customized for you, in your hand, 24/7.  

Directives like PSD2, which mandates banks to make account and payment information readily available to third parties, make banking more open helping tech companies accelerate the digitalization of financial services.

Disruption from tech giants will be a more serious challenge to the market share of banks than that from fintechs. The giants can combine/harmonize best-of-breed solutions from startups/fintechs to offer more holistic solutions to the wider market.  This could be making international trade easier, fast and efficient international money transfer, making it easier to store, convert and use money in a way it is not limited to one currency etc.

Banks’ primary focus is core banking whilst tech giants have a much wider focus spanning various verticals developed mainly through strategic partnerships. Their global presence means they can appreciate and tailor solutions to appeal to customers from various demographics. This could seriously disrupt any industry, not just financial services.

Finance plays a providential role in every industry and banks are at the center of it. The race for growth and profitability in various industries demands innovative services from the finance industry and fintechs have capitalized on it. The fact that fintechs mainly fall outside of the regulation has also helped this rise.  

Regulators will soon catch up with the fintech revolution and may compel a greater partnership between fintechs and regulated banks, as the market grows. The resultant ecosystem would have banks providing the platform and wholesale offerings for fintechs and tech giants.  This would mean banks are in fact better placed to harmonize fintech solutions and partner with large enterprises to shape the future of not just the financial industry. 

Innovation from banks will develop the standards, processes & technology to combine fragmented fintech solutions, make them interoperable such that they can be scaled across regions and industries. It should allow for opening up of banking platform to create end user solutions by banks, fintechs and tech giants alike.  

It could very well be that the future ecosystem of the financial sector will include tech giants along with fintechs and banks. The race is on to connect the fintech dots.

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