With commercial models, value chains and M&A activity emerging as a leading theme of Money 20/20’s upcoming conference in Las Vegas, we explore how financial institutions are leveraging the opportunity to collaborate with incumbents and disruptors across the space.
Ashwin Shirvaikar, managing director of payments & IT services companies at Citi says the surge of partnerships “is not a temporary shift. It’s a continuation of a process that started many years ago. The current consolidation process has been driven by a few points, namely, scalability, costs and innovation of customer experience. Of the companies involved in three largest deals this year, their existing form was already a result of M&A themselves.”
M&A activity involving payments companies has been the driving force in the financial technology space this year, with enterprise financial software remaining the largest Fintech sub-sector. S&P reports total deal value for 2019 passed that of 2018 by June with Global Payments Inc’s $22.15 billion planned acquisition of Total System Services Inc. The Fintech industry posted 381 deals for an aggregate $76.33 billion in 2018 but has recorded 193 deals totalling $121.18 billion in M&A activity through to August 15th.
These figures aren’t insignificant and parties on both sides of these transactions are bullish on the persistence of collaboration long into the future. Economies of scale are increasingly showing their attractiveness, as acquisitions and partnerships remain the most compelling strategies toward achieving competitive advantage.
Shirvaikar describes the tone of the industry through a measure of synergies in cost and revenue which companies haven’t always had the luxury of exploring; “With these partnerships we have both cost synergy and revenue synergy; the cost part speaks to the desire to remain competitive, and the revenue synergy aspect clearly points to the new opportunities being explored.”
A recent study by Finextra found 81% of bank executives surveyed said that collaborating through partnership is the best strategy toward digital transformation.
Ed Molyneux, founder and CEO of accounting technology platform, FreeAgent, says “It’s always been the case that the large corporates have turned to smaller partners to help them innovate. This is the classic pattern of potential disruption in every industry where the incumbents are trying to get innovation, before the disruptors get distribution.”
“It just so happens that the pace of innovation in financial services has accelerated so much in the last five years, that there are now companies doing innovative things in start-ups that are built in a way that they wouldn't really have been possible 5 or 10 years ago…I think it's a very natural response that the large corporations and banks are finding ways to bring innovation into their world - beyond what’s possible within existing structures.”
FreeAgent, in partnership with RBS now provides access to online cloud accounting software to its small business banking customers. The service is integrated with the SME’s banking accounts and is free for RBS Business Banking and NatWest customers.
Andrew Harrison, head of business banking and entrepreneurship, RBS, speaks to innovation as a signpost or a ‘new digital textbook’ insofar as ensuring that innovation meets customer expectations of the user experience.
“Customers experience increased use of digital in their personal lives, this grows their access to digital products and services. I think that that the threat of rising consumer expectations is also a really positive force because the larger institutions and banks really need to step up to that. The best way to do that is by partnering with the Fintechs who bring that innovation to really deliver good customer experience with insight and a pace we wouldn’t be able to deliver by ourselves.”
Gaining access to new customers through accelerated distribution is highly prioritised by disruptors, as market share is fiercely defended and brand reputation still goes a long way.
Molyneux comments that their partnership with RBS “works for everyone really because it’s a shortcut for FreeAgent to RBS’ distribution channels, plus the bank gets a shortcut in bringing an award-winning accounting platform that the customer loves to their customers. Everyone is happy.”
Further, the cost of customer acquisition in the market is a significant hurdle for Fintechs, but as explained by Harrison, “if you partner with an organisation that already has those customers, your costs to scale should be a lot less.”
Valentina Kristensen, director, growth & communications is well placed to speak to the benefits of partnership for new companies given her experience at challenger bank, OakNorth. The Fintech unicorn this year partnered with the likes of Monzo and MoneyBox, which “enabled us to offer our award-winning savings platform to a wider demographic and gain additional customers who may not otherwise have come to us. Their deposits in turn help fund our lending to SMEs in the UK. The more deposit customers we have, the easier it is for us to fund our lending, so it’s benefitted both the savings and lending sides of the business.”
Concerns have been expressed over banks’ suitability for teaming with the nimble fintech sector for reasons including organisational complexity, size, operational concerns (eg integration), and corporate culture clashes, but this doesn’t appear to be dampening the fervour for partnering up.
“We definitely held concerns about working with a large, established institution, and we were very wary at the outset that it would be basically impossible to get anything done,” Molyneux says.
“But actually we were pleasantly surprised, both in terms of the openness of the teams at the back-end when we were starting up in the early partnership stage, thinking about what customers wanted and the scale of which they were prepared to do that, and the pace at which they do things. We were really encouraged by that and reassured by that.”
Shirvaikar comments that in terms of the top acquirers in the industry, we’re seeing a strong concentration towards the top in terms of market share, capabilities, and differentiation of what they each offer. “When you take a forward-looking approach this would imply that there is not as much reason or rationale for a merchant to not partner with one of these companies.”
The element of trust isn’t lost on RBS and FreeAgent, who recognise that with rapid technological advancements and the push for transparency, consumers won’t tread new territory if they don’t trust that not only their finances, but their data, is in trusted hands.
Molyneux touches on the drive to deliver personalised insights using data already held by bank customers and combining that to create efficiencies and predictive tools which are intuitive toward the needs of each account.
“What we are working on already is bringing in much more rich data about customers across that boundary, so that we can do more interesting things for customers than you would be able to if restricted to the open banking data set. We’re thinking about things like, future-dated payments or pre-assessed lending limits.”
“These kinds of things are very powerful in the conditional accounting system and that's where you know we see a lot about the powers, being positive, the audience group, really coming to the fore in the future.”
By Paige McNamee, Junior Reporter, Finextra