We’ve all heard the chatter: FinTech firms are banks’ biggest competitors in the lending and payments. FinTech is going to destroy traditional banking. FinTech is the enemy.
These days, it’s rare to attend an industry conference, participate in a company meeting, read an industry publication, peruse a banking industry website or chat around the water cooler without getting some version of those messages. At Deluxe, we’ve had some great conversations with some of our 5,500 customers about their FinTech concerns and what it means for the future of the industry. Disruptors like marketplace lenders and digital wallets have inspired a great deal of fear in the banking world. They’ve also generated a lot of confusion.
The evolution of terminology
You may think you know the meaning of the term “FinTech” but it’s actually not an easy one to define. Prior to the emergence of peer-to-peer lending (a.k.a. marketplace lending) and digital wallets, “FinTech” referred to companies that built and managed the hardware and software traditional financial institutions used. Rather than something aimed at disrupting the brick-and-mortar banking industry, FinTech supported it.
Those who have been in the financial technology and services field since long before the first online lender appeared on the scene often feel the term “FinTech” has been hijacked. Over time, the term evolved to refer to a maverick group of startups that leverage superior technology to challenge traditional banks in lending and payments spaces.
However, in its report “FinTech’s Golden Age,” Accenture postulates that the concept of FinTech is still evolving. “Now, there has been a move toward collaboration as tech-savvy startups partner with, or are acquired by, established financial institutions,” the report says.
In that sense, “FinTech” has come full circle, from an original concept of partnership to one of competition and back to collaboration.
Sorting out the players
A myriad of players in the financial space qualify to be termed “FinTech.” They’re certainly not all the same and only a small percentage of them could actually be considered “enemies” of traditional banks. What’s more, there’s evidence that even those competitive players are moving toward a more collaborative relationship with banks.
Online lenders like OnDeck and Lending Club are considered FinTech companies. The term is also applied to digital wallets like those provided by Apple and Google. Deluxe is also a FinTech company — we help banks use technology to improve processes and reach the right consumers with the right message. Companies that build and support technology infrastructure for financial institutions can also be considered FinTech.
In the past decade, two types of companies emerged — those that used technology in order to compete head-to-head with banks in the lending, investment, and payment spaces, and those that used technology to support the traditional banking industry. Deluxe falls into the second group, and Lending Club in the first.
Debunking the myths
In our partnership role with traditional banks and credit unions across the country, Deluxe professionals encounter numerous misconceptions about FinTech in the course of doing business. Let’s confront some of the worst head-on:
No. 1 — FinTech is the enemy.
Some FinTech companies compete with banks and credit unions in payments and lending markets. Others, like Deluxe, support traditional banking organizations through technology-based services and products. The word FinTech shouldn’t be a dirty word among your peers, in fact, the vast majority of FinTech companies are friendly and complimentary. While you need to be cautious of the first group, there are also growing opportunities to build partnerships with these FinTech firms to bring their appealing business model to your customers or members.
No. 2 — FinTech is going to destroy traditional banks.
Banking has been around a long, long time. While technology is definitely transforming the industry, traditional banking will never disappear. Individual banks or credit unions, however, may fade away if they fail to leverage the digital transformation to their advantage. Is this the fault of FinTech companies? Not really, it’s the evolving nature of business in our society today.
I’m guessing that most of you have read the book “Who Moved My Cheese” by Dr. Spencer Johnson at one point during your career. I think it was required reading at most companies during the turbulent 2000s. Technology is doing something similar to the banking industry (and frankly most industries) today. We have to be looking to the future and the future involves financial technology and a change in how you do business. This change doesn’t happen by accident, you need to be strategic in your approach if you are going to survive through some of the challenging times ahead. The banks and credit unions that don’t navigate this change well might feel like FinTech destroyed them, but that really isn’t the case.
No. 3 — FinTech is going to run away with all our millennial business.
While millennials are the generation with the highest comfort levels and affinity for technology, numerous studies underscore their desire for the kind of personalized customer service that community banks and credit unions excel at providing. Traditional banking entities can capture their share of the millennial market by using technology to provide millennial customers with highly personalized experiences. It’s not one or the other, but both. If you want to win over millennials, you need to offer a great digital experience coupled with a customer experience at all stages of the relationship.
This means a change in how you target and approach consumers, the kind of technology you need, the staffing and training you use, the technology you give to consumers, and much more. It’s an evolution and when you get comfortable, that probably means its time to start looking around again!
No. 4 — FinTech firms are startups companies that won’t survive in a tightly regulated industry.
FinTech companies range in size from small to massive. Some are startups and some are established entities. Some are disruptors and others are collaborators. Painting all FinTech with the same brush is shortsighted at best. Many FinTech companies won’t survive and many others will be bought up by more established players looking to offer a broader suite of solutions. But with that in mind, you can’t discount the startups or think they are all startups.
No. 5 — FinTechs aren’t interested in working with traditional banks and credit unions.
FinTechs are out to make money, just like traditional banks. Savvy FinTech companies are beginning to explore the moneymaking potential of partnerships and collaborations with traditional banking organizations. In fact, six in 10 of the 265 global banks polled by IDC on behalf of SAP are open to partnering with financial technology firms. One in three banks (34%) are open to a collaboration with a FinTech company and one in four (25%) would consider an acquisition, the survey found. I think Rob Hetherington, global head of financial services for SAP summed it up nicely:
“Banks are in the midst of digital transformation, looking for ways to speed their time to market and to deliver new value or services to customers. Start-ups, on the other hand, are mobile, agile and built solely for the customer, yet they lack the regulatory know-how and customer confidence that large, global banks have. Both have something the other wants, and I anticipate that we’ll witness far greater collaboration, integration and – in some instances – acquisitions happening in the next year.”
Moving toward collaboration
Worldwide investment in financial technology soared in the past five years from just $1.8 billion in 2010 to $22.3 billion in 2015, according to Accenture. Even more noteworthy, 60 percent of FinTech investments in North America last year went toward collaborative firms, not competitive ones. That’s a complete 180 from the investment breakdown just five years ago.
Of course, some FinTech companies (Deluxe) have always been collaborative. Others that started out as disruptors are now moving toward collaboration. Deals like the partnership between OnDeck and Lending Club with mega-banks Chase and Citi, respectively, illustrate what Accenture seems to see as the next step in the ongoing evolution of FinTech.
The move toward collaboration makes sense for FinTechs and traditional banks alike.
The banking industry is still struggling to wrap its collective arms around the digital transformation. The need to grapple with legacy systems means most banks will be hard-pressed to compete with FinTech firms for sheer technological agility. Partnering with FinTech lenders and payments providers can be a cost-effective way to stay competitive while banks continue to modernize their tech.
For FinTech disruptors, collaboration with traditional banks can open up new markets, and allow them to tap some very powerful brand recognition with less investment in marketing directly to consumers; mega-banks like Citi and Chase have well-established reputations and vast existing customer bases.
And then there’s us …
Established FinTech providers haven’t been in the thick of the battle between FinTech disruptors and traditional banks, but we haven’t exactly been on the sidelines, either. As traditional banks strive to manage their digital transformations, FinTech providers have been striving to assist by developing technologies, products, and services that will allow banks and credit unions to remain competitive in a digital world.
While some “FinTech” firms are just starting to discover the value of working with banks, rather than against them, providers like Deluxe have been in your corner all along.