Don’t try to be a wolf in sheep’s clothing if you’re not a wolf

There are so many people who have been saying banks are boring, unable to change and incapable of being truly digital, who are being challenged by challenger banks and fintech. Yet, here we are on the cusp of 2023, and all of the challengers and start-ups are begging for banks to work with them. What’s happened?

In simple terms, it’s a recession. When you look at Tier 1 bank results over the course of 2022, they’ve been better than ever. Lenders always make more margin when customers are financially distressed. On the other hand, the start-up marketplace in which most fintech companies are involved is struggling over funding, cashflow, run-rate and the ability to just keep going.

Looking ahead

This makes the outlook for 2023 interesting.

First, most fintechs are desperate to work with banks to keep themselves going. As a result, most banks have a great opportunity to pick up partners at discount rates. Having trouble with know-your-customer requirements? Here’s a solution for a fraction of the cost of what it was in 2000. Want to solve that online checkout issue? Here’s a solution for free.

Second, if fintechs can’t partner with a bank, maybe the bank should buy them. There are many fintechs looking for a quick and easy exit as founders facing hard times look to sell. Is it time to think of buying a firm? If nothing else, a bank could acquire their talent.

Third, if a bank doesn’t buy a fintech, then one fintech can simply buy another. There’s going to be huge market consolidation in 2023 through mergers and acquisitions (M&As). Similar to the 1999 internet bust, there will be firms that come out of this crisis bigger and stronger, but for every firm that succeeds, many more will disappear. Bearing in mind there that are at least 25,000 start-up fintechs out there, that makes cheap pickings for anyone with the money.

Fourth, banks can double-down on their digital strategies and succeed in carving out market space where they’ve previously struggled. Tactics like closing down branches and physical operations, as well as augmenting digital services with enhanced partnerships and acquisitions, will create major opportunities in all areas of banking.

Tread carefully

On this final point, it is true that those banks that are strong in the markets today will be stronger tomorrow. However, if a bank is considering diversifying into other areas of finance, it should not take this decision lightly.

For example, it’s interesting that Goldman Sachs is now limiting its ambition following the launch of its retail digital challenger bank, Marcus. Why is it retrenching? Because the digital bank is not profitable; it is bottomless hole of investment and has caused significant internal soul-searching. According to reporting from external commentators, Goldman Sachs’s CEO David Solomon wanted Marcus to be a fully formed retail bank offering chequing accounts, but his management team disagreed.

Marcus will go down in history as an example of an attempt to disrupt markets from what people will call ‘an incumbent’. Even an incumbent cannot understand its markets when it specialises in one and not another. I applaud Goldman Sachs’s attempt to break into the retail markets, and particularly its work with Apple, but maybe the lesson learned is to stick to the knitting.

The lesson to take away is that 2023 offers great opportunities to expand services and grab market share, but you can only do this if you are qualified. If you are a retail bank, there is a great opportunity to become a bigger and better digital retail bank through M&A. But banks should only do this if they are confident in their own core competencies and should not buy services outside of their field of expertise, as evidenced Marcus’s submission to greater market forces. Equally, investment banks can become a bigger and better in 2023, as long as they don’t try to enter markets where they have no expertise.