The ongoing collaboration between banks and fintechs presents an opportunity for financial institutions to rethink and update their offerings in 2019, by bringing them into real time – as innovators in the southern hemisphere are already doing, says Chris Skinner.
What can we expect in 2019? More of the same? More news about fintech start-ups becoming unicorns and threatening to take the bank’s lunch? Or more news about big banks going digital and starting to work effectively with fintech start-ups?
In my view, it will be both, and is a continuation of a trend that has been emerging over the past few years.
But perhaps the most interesting development over the past five years is how fast things are changing. What was a rally cry from the fintech start-up community to destroy and disrupt the banks has matured into ‘let’s collaborate and co-create with the banks’. What was a regulatory structure that prohibited new entrants has become a nurturing structure to encourage innovation through regulatory sandboxes. And what was a closed and proprietary industry that kept to itself has become an open banking community, ready to partner with anyone who can help.
Joint thinking
What will be particularly interesting in 2019 is to see the new things that banks and start-ups can do together. There are already a few examples, although they are far and few between. We have seen JPMorgan Chase working with and acquiring several innovative companies such as WePay, while in the Nordic region Nordea Bank has teamed up with Spiff to encourage saving and investing for the mobile era.
This year we will see much more of this activity, with banks actively seeking out start-ups to partner with before their competition does, and start-ups wanting to see such partnerships as it gives them respectability. I often say that if you were starting a new firm focused on finance, the first thing you want to do is get a regulator’s endorsement as that brings you trust. If you get a bank's endorsement, it brings you more trust as well as customers. This is why this collaborative world makes so much sense. For a bank, it brings innovation and ideas fast to their slow-to-change legacy structures; and for a start-up, it brings credibility and reputation, things that are hard to gain when you are a young firm.
The only thing that concerns me is whether there are too many firms doing what they have always done, but now doing it cheaper and faster with technology. I have a strong feeling that most of the European and American fintech developments are creating faster banks but not different banking. A little like Henry Ford’s age-old quote about if you asked the customer what they wanted, they would have asked for faster horses.
A rethink not a retread
Faster banks are good, but digital is far more transformative than doing what we have always done cheaper and faster with technology. It is a chance to rethink everything we have always done.
This is why 2019 will become interesting, as we may see a very new development. That would be the reimagining of traditional financial products based on the developments appearing in Asia, Africa and Latin America. In these regions, there are large swathes of unbanked and underbanked people, and there have been many developments in financial inclusion that could easily spread into mainstream financial products for everyone.
A good example I often use is Alipay. The financial product offers payments, but when you’re not using your balance to pay for something it can automove your money to savings and back again, dynamically in real time. The system can offer you a loan of a dollar for the next 60 minutes or $5000 for the next 24 hours.
This is what’s interesting for me, as the core of most financial products stem from the industrial age, where physical distribution was high cost and high overhead. It led to offering annualised products as more frequent contact and service would just make the products unworkable – which is why we have annuity-based loans and insurances.
Moving to the new digital world and looking at what is developing out of the Southern Hemisphere leads to a far more dynamic and real-time financial structure. In this new world, products are priced for now, usable for now and serviced for now. If you want insurance for the next two hours on your iPhone and Mac, then it is 50 cents. Swipe to accept.
This is the new world of banking and finance and I fully expect 2019 to leverage open banking and application programming interfaces to create a real-time connected world of money fit for 2020.
Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.
