Traditional finance players and fintech startups have been in an arm-wrestle for the best part of a decade. At the next finance/fintech conference you attend you’ll see panels discussing the Big Questions like: are fintech startups disrupting the system or just gently tickling it? Who is winning the hearts and e-wallets of consumers?
If you’re new to the world of fintech and need to look vaguely like you can follow the arguments, I’ve created this cheat sheet. Use it for small talk at your next ‘Future of Finance’ conference and to decide which side you’re rooting for.
The two sides of the debate
There are two broad schools of thought on the future of fintech and how it will change the financial landscape.
Argument 1: Fintech startups will replace traditional banks
Aka ‘raze them to the ground and salt the earth’
The theory goes that fintech – nimble, tech-savvy and customer-focused – can meet all the financial needs of business and consumers, thereby rendering traditional players obsolete. As David M. Brear put it: “The ‘too big to fail’ approach didn’t work well for dinosaurs”.
The posterboy for this view is arguably Tom Blomfield, CEO of Mondo in the UK. Challenger banks such as Mondo, Atom and Starling are gathering press, investor funding, and (according to them) delighted customers in Britain. Fully licensed and regulated by the FCA, they are offering a ‘full stack’ of banking services to customers, from savings to mortgages to credit cards, usually through mobile.
The question is, can legacy banks compete?
Do say: “Raising £135 million before getting a single customer shows investors are taking Atom’s license seriously”
Don’t say: “Sure isn’t the Mondo yoke as same as my AIB app?”
Argument 2: Fintech will leverage APIs to augment and sit on top of traditional banking
Aka ‘the dumb pipes’/‘because Apple isn’t rich enough’ theory
“Money is just information today” explained Uphold CEO Anthony Watson at SXSW recently, as he argued that banks will soon be relegated to a utility.
The most infamous analogy for this is how telcos – previously the gatekeepers of our communication through calls, SMS, and the hilarious MMS – became ‘dumb pipes’, facilitating the raw data for services like Skype and WhatsApp.
The catalyst for this change is an EU directive called PSD2, which will (among many things) force banks to provide customer account data via APIs by January 2018. These APIs will allow fintech startups, and tech giants, to make payments on your behalf, and traditional players are very nervous about this.
Imagine giving Amazon permission to take payment for your shopping by debiting your current account – no credit or debit card required. Imagine having an Ulster Bank current account and Danske Bank savings account and doing all your online banking through one third party app. This will all, theoretically, be possible.
An expert in this field, Dave Birch has forecast that “APIs will restructure the way the industry works, in a relatively short period… and banks are really going to have to fight to provide some kind of service”.
Do say: “What’s the latest on Facebook’s application for an e-money license?”
Don’t say: “Is PSD a traumatic stress disorder that banks get?”
Secret option three: Fintech and banks get into bed
Aka the ‘sugar daddy’ route
Can’t we all just get along? A recent report by Oliver Wyman and Santander claims it’s in our best interest:
“The strengths and weaknesses of both banks and fintechs mean that both will often do better by cooperating rather than by competing”.
Of course fintechs are loath to admit it (especially at the early, idealistic stages), but sometimes collaboration is inevitable. It’s why Venmo is now owned by PayPal, and Simple sold out to BBVA. After all, fintech needs a lot of investment to pass regulatory and compliance hurdles, and banks have piles of money lying around (I’ve heard).
These alliances can take different forms. Some banks make stealthy, indirect investments across a range of startups and watch closely. Some host incubators, so they can “lick innovation off the walls” as one fintech muttered recently.
Other banks like to keep their enemies even closer: BBVA has a 29.5% stake in ‘challenger bank’ Atom. Stripe and Visa recently announced a partnership-investment.
Naturally this leads to straight-out acquisitions. See BBVA’s acquisition of Holvi, an online-only bank for entrepreneurs and SMEs in Finland. These mean good news for investors, but what about customers?
And when will Google and Facebook start a spending spree on fintech? Stay tuned.
Do say: “BBVA will buy anything with a pulse and a licence, and it doesn’t matter about the pulse”
Don’t say: “Is there a capital ‘t’ in fintech?”
The article first appeared on the Plynk blog