Fintechs: Friends or Foes?

Joe Proto – CEO, Transactis

Originally published in Transaction Directory
Full 2018 Predictions article in Transaction Directory can be read here.

2018 will be an important year for traditional financial institutions to reestablish their position as payment industry leaders. While many predict that banks will lose even more ground to nimble, less regulated, up-and-coming fintech companies with innovative offerings and backed by huge amounts of venture capital, there is evidence that the tide has turned.

Last year’s big question was, “Is fintech friend or foe to banks?” It’s easy to see why most would say ‘foe.’ Fintech startups have been constantly entering the market, making it easier for customers to manage their finances without their bank. Companies like Affirm, AvidXchange, and Transactis have certainly captured the interest of both investors and banks. So what is changing? Many startups have struggled to capture traction in the market. Customer demand is fickle and trends shift overnight. Financial institutions are an integral part of customers’ lives and smart fintech companies need access to banks’ large customer bases for their continued growth.

“There is plenty of opportunity for traditional financial institutions and fintech companies to co-exist, said Aman Sharma, partner at Capital One Growth Ventures. “Collaboration is the way of the future and the biggest impact for fintechs will be through working with the incumbents. A noteworthy trend is externalization of banking API solutions, that allow for easier data access, effective communication and deliver faster, efficient financial services products to the end user.”

I predict that in the coming year, more fintech companies will want to work with banks, and banks are already noticing the advantages of working with fintechs. “Fifth Third embraces fintechs as partners who can help make us better and enable us to bring differentiated solutions to market for our customers,” said Jeff Siekman, senior vice president and director of payment products for Fifth Third Bank.

Banks also recognize that they must not make the mistakes of the past. Ken Chenault recently said banks are at risk of being sidelined in payments, exemplified by their decision to take Visa and MasterCard public. He called this, “One of the biggest strategic blunders of the last 20 years.” With customers turning away from cash to emerging payments technologies, traditional financial institutions have lost access to key data from both merchants and consumers. This has paved the way for fintech startups to enter the market with products that reduce payment friction, making it easier for customers to control and use their money. According to CB Insights, as of Q3 2017 over $12B has been invested in fintechs, and this trend will continue as more banks look to increase their own spending on payments technologies.

“Banks and fintech providers are slowly learning that each has important resources that the other does not, and so the ‘us vs. them’ mentality is evolving into more collaborations,” said Rick Burke, head of corporate products and services for TD Bank. “Corporate treasurers are coming on board as well. In fact, a recent TD Bank survey at the Association of Financial Professionals conference showed that 31 percent of financial professionals plan to leverage fintech solutions as a way to prepare for disruption in the industry.”

If 2017 is known as the year banks lost ground in the payments space, 2018 will be the year they gain it back and then some. “When a strong financial institution and an innovative fintech are able to align interests and collaborate to bring market leading solutions to their mutual clients, the combination can be powerful as well as sustainable,” said Paul Simons, managing director, supply chain product group manager for BNY Mellon Treasury Services. “So, it’s not really a question of friend versus foe. The question is really about how these entities can effectively combine their unique knowledge, experience and resources to deliver meaningful results.”

Agreed! Instead of competing, banks and fintechs will aggressively find ways to serve customers better together than they either group could do on their own.