Stop competing, start banking - financial utilities, the perfect match for banks and fintechs

The evidence is piling up. Pressure is building. Banking is changing. One global survey in 2017 showed that more than half of 18-34-year-olds are so keen for their banking to be more simple, convenient and personalised that they would consider banking with a familiar tech giant rather than a traditional bank. Banking Circle research also showed that banks are gearing up to take on the challenge presented by FinTechs. And the 2018 FinTech Disruptors report revealed that both banks and FinTechs are keen to pair-up to deliver better solutions.

With more agile FinTechs building innovative solutions designed specifically to meet customer needs, the front-end of payments is being rapidly simplified. Seamless payments, local or cross border, are making the world smaller and more accessible. Whilst this began as a consumer finance trend, it is quickly spilling over into business banking. FinTechs are allowing even the smallest business and newest start-up to operate on a global scale, sending and receiving payments quickly and cheaply, regardless of geography.

Compared with the traditional correspondent banking network process, FinTech payments are received in seconds rather than days, cost pennies rather than pounds and take place with just a few taps or clicks rather than detailed paperwork and phone calls – or even trips to the local branch. Assuming there is still a local branch.

The 2018 FinTech Disruptors report, published by MagnaCarta in December 2018, includes insights from some 5,000 professionals working in banking, financial services and FinTech across EMEA. Those surveyed and interviewed for the report believe 31% of bank revenues are at risk from FinTech competition over the next five years.

Collaboration – not competition

Banks recognise that their value-added lies in managing the customer relationship, and they need to focus their resources there, not on the back-end. As such, many banks are already partnering with third-parties – Financial Tech businesses and financial utilities such as Banking Circle – to deliver their non-core services. It’s a new world of seeing each other as collaborators rather than just competitors.

As recently as five years ago, the idea of large or small banks working with external partners to deliver banking services was unfathomable to most. However, in today’s market, with the complexities of legacy systems together with the rapidly increasing competition from FinTechs, banks are ready for this vision. Most have accepted that partnerships are the only way they can remain competitive, as it allows them to offer their valuable customers the best solutions, without compromising on the relationship.

FinTechs, according to the 2018 FinTech Disruptors report, ‘make better use of insight to develop and improve what they sell. More than half of FinTechs use customer insight to design products, compared to a little over one quarter of banks.’ Building solutions together is often the best path. However, as Michael Rouse, chief commercial officer at Klarna in Sweden, said in the report, “You have to make careful choices. Ask yourself ‘who do I want to work with that also wants to solve the same specific problems?’”

Mitesh Soni, director of innovation and FinTech at Finastra, added, “Real platform players are coming into the market from adjacencies such as big tech companies like Google, Amazon, Facebook, Apple, Alibaba – they don’t have core banking experience but are looking at the world through the lens of consumers shaping attractive user experiences and have a real advantage.”

Financial utilities - which essentially do not compete with the banks or the FinTechs - can underpin a financial institution’s offering, providing their non-core functions such as payments, FX and lending. This allows financial institutions to focus on their customers and add value to their customer service proposition, and, importantly, remain competitive.

The future for banks and FinTechs

The 2018 FinTech Disruptors report showed that for the third consecutive year, partnering or extending existing partnerships are the main goals of banks’ intentions with FinTechs. Of course, these goals are not always easy to bring to fruition. As the report explains, banks have very different cultures and legacy systems in place, compared with FinTechs, and this can cause compatibility issues and delays in collaborating successfully. Faster-paced FinTechs can find these processes frustrating.

In the current market, banks and FinTechs are still quite some distance apart, but the gap is closing. The 2018 FinTech Disruptors report states that consumer trust in banking has bounced back from the lows experienced during the recession, but the success of the FinTech sector has proved it is here to stay. The report also concludes that whilst the “customer-centred, data-rich operational model of FinTechs is more relevant than banks’ in a digital age”, “FinTech’s ‘no legacy’ advantage is no longer a given.”

By working in partnership with FinTechs and financial utilities to provide efficient and convenient solutions, banks are now better able to compete in this market, where “progress will be determined by an ability to respond to new technologies and emerging regulations”. Banks are becoming more agile, and in ten years’ time, banks and FinTechs will look much more similar than they do today.

Consumer insights for business banking

Trends in business usually stem from trends in the consumer market. Consumers expect better, faster, cheaper banking solutions in their personal lives and once this becomes well established, they expect and demand the same level of service in their business lives.

The consumer market has provided clear demonstrations of the value which FinTechs can add. The 2018 FinTech Disruptors report includes a dramatic example from Andre Fredericks, chief information officer at South Africa-based IndieFin: “FinTech is helping to solve the problem of an ageing customer base in the life insurance market. The technology that we use has opened up this sector to a millennial audience - over 70% of the policies we’ve sold are to consumers under the age of 40. That’s the direct inverse of the wider life insurance category, where the vast majority of policies are sold to people aged 50 and older.”

Robust data is vital when building a new solution in today’s market. Solutions should be built with the customer’s requirements and preferences at the heart. Data helps to continually ascertain customers’ changing needs and how the solution could be best delivered to get the highest level of interaction.

Many banks and FinTechs do not have the in-house resources to monitor the market, analyse the latest data and successfully implement a continual process of renewing solutions to ensure they meet changing market needs. This is where partnering with a third party financial utility such as Banking Circle can bring huge benefits. The financial utility can handle the tech side, without it being a burden on resources. The financial institution is then able to offer affordable, flexible and efficient credit, payments and FX to all customer segments. This allows banks and FinTechs to provide the best service possible, empowering businesses to reach their full global potential, without payments holding them back.

About Anders la Cour

Anders la Cour is Chief Executive Officer at Banking Circle. He used his experience in legal M&A as well as in venture capital, coupled with a strong commercial acumen and entrepreneurial mind-set, to co-found Banking Circle (then known as Saxo Payments) in 2013, with backing from Saxo Bank. In 2018 he played a key role in arranging the acquisition of Banking Circle by EQT VIII and EQT Ventures. He is also a board member of YouLend and an adviser to other financial technology businesses. Anders was named Entrepreneur of the Year in the 2016 Emerging Payments Awards and Gamechanger of the Year in the ACQ5 2018 Global Awards, in recognition of his leadership in bringing to market the innovative Banking Circle solution to tackle the cost and time challenges of cross border payments. He was appointed to the Emerging Payments Association Advisory Board at the end of 2016.

About Banking Circle

Next-generation provider of mission-critical banking infrastructure, Banking Circle is underpinning the service proposition of Financial Tech businesses, PSPs, FX providers and banks. By leading the rise of a super-correspondent banking network, Banking Circle is helping financial institutions to provide their customers with faster and cheaper cross border banking solutions, without the need to build their own infrastructure and correspondent banking partner network.