The argument about if
Fintechs and Banks are frenemies would never end. And it’s justifiably so.
Retail banks have a model of providing checking, savings, investment account services. Of course, they layer that with credit cards, personal loans, mortgages, etc. Fintech showing up on the scene means one thing, banks would be losers. There isn’t any clearer
way to say it.
Think about it this way, banks earn money from these services and would want to continue that way. Fintechs showing they could do it better means they also want to gain something as well. So, any of these could happen: banks would lose, and Fintechs could
gain; Fintechs and banks would gain from increased service cost and customers would pay more; Fintechs would lose, and banks would be cool.
There is also the friction that comes with who owns the customer experience. Most banks loathe to see new players sandwich between them and the customers and would prefer to control every single data point. On the flip side, when customers start to use apps
for Personal Financial Management and their bank accounts, they start seeing the banks as a repository of their funds or provider of loans.
Retail banks don’t even trust Fintechs as their services tend to aggregate and disintermediate. None of the banks want to be a bucket for storage.
But wait, why not?
The traditional model makes losers out of the retail banks for Fintechs to win, maybe the only way would be to have a new type of bank, modeled from grounds up to take away the arguments of retail banks.
So imagine a bank, fully licensed but whose interaction is via APIs that Fintech and others can use to connect to it. Fintechs are the actual customers because the banks help them to hold their customers’ funds and loans in compliance with the regulation.
Dropbox was happy to become the programmatic storage for many apps, and that cemented its position in the world of cloud storage. Of course, Google Drive, Box, Microsoft OneDrive, etc. support the same approach but
nothing represents personal commodity storage more than Dropbox.
A bank, fashioned after Dropbox, could have the same model and would face no pressure to compete with Fintechs but be the backbone for them. Such a bank, with no direct customer interface, would be barebones to run with the most minimal of operational overhead.
Could this be a viable model?
If this model works, then it’s possible that the future of banking will be the gradual transformation to the utility company providing services to the Fintechs who will own the customers. Nevertheless, there may not be a total elimination of the traditional
model though, or one where all banks become a full-scale utility.
The harsh reality for Fintechs is that banks still own the customers' trust for now and that counts for a lot.
Being a utility player offers no room for differentiation, and it simply becomes a case of the best bank offering ease and variety of API integration (across the various requirements of the Fintechs - Risk and Regulatory Compliance - i.e. KYC, AML, security
of deposits, etc.).
What is likely to happen is more of a gradual acceptance of the Fintechs services as options for customers in areas where the banks may not have the capabilities. For example,
Santander is selling SME lending via Kabbage or providing
Personal Financial Management via Meniga, The ultimate Fintech bank that will provide an integrated suite of all the customers' required financial services may just not be on the horizon yet.
But it will be interesting to see how this pans out for the future of banking.