Propelled by data-driven innovation, fintech companies continue to gain traction – taking some financial firms by surprise. For banks that are looking into investing and partnering with fintechs to ensure relevance and growth and avoid losing market share, the time is right for strategic collaboration.
Bank leaders by and large saw the arrival of financial technology companies (fintechs) as a challenge. Lately, though, they’ve started to see things differently: traditional bankers are becoming increasingly open to the idea of collaborating with fintechs of all types, with an eye towards improving their own firms’ offerings and accelerating growth.
The timing is right. As the fintech world enters a more mature phase, fintech leaders are also looking beyond their own organisational boundaries for new ways to better the odds of their companies’ long-term survival and success.
The issue is whether these forays will deliver on their potential. Banks stand to gain capabilities in five distinct areas via fintech collaboration, but only if they move forward with a clear understanding of the fintech universe and an informed perspective on how to make such a relationship work.
[su_pullquote]Banks need a purposeful strategy to combine the strengths of traditional banking with the innovative solutions offered by fintech. [/su_pullquote]
That is, banks need a purposeful strategy to combine the strengths of traditional banking with the innovative solutions offered by fintech. They need to be prepared to “lead in the new,” by capitalising on fintechs’ abilities to maneuver and analyse massive quantities of data, and by pivoting wisely to leverage the insights they generate.
Fintechs naturally fall into one of two different categories, the lending-focussed “fintech fins,” which work directly with consumers, and the business-to-business oriented “fintech techs,” which concentrate on providing specialised technologies for banks. As Figure 1 shows, there are also two distinct groups within the fintech fin category: Peer-to-Peer Marketplaces, and Online Lenders. (The evolutionary trajectory from fintech tech to fintech fin, however, likely means that this classification is not static.)
Historically, the Online Lenders attracted the most funding (42 percent). But venture capital funding for fintech fins dropped sharply in 2016, both in Europe (with a total of $589 million, down approximately 50 percent in 2016 from 2015) and in the U.S. (down approximately 67 percent in 2016 from 2015).1
[su_pullquote]Accenture’s analysis indicates that fintechs face difficulties – both in scaling up and in becoming profitable – that may explain this still-uncertain investment climate. [/su_pullquote]
Accenture’s analysis indicates that fintechs face difficulties – both in scaling up and in becoming profitable – that may explain this still-uncertain investment climate. For example, 40 to 50 percent of fintech fins report negative earnings before interest and taxes (EBIT). In addition, these businesses have spent heavily to sustain customer acquisition rates. They show an above-average cost to serve and their marketing expenses often reach 50 percent of their overall operating expenses.2
As a result, many of the players in the fintech fin category remain relatively small. On average, a European lending-focussed fintech generates annual revenues of about €30 million (US $33 million). While double-digit annual revenue growth is not uncommon, very few players report revenues above €100 million (US $109), and those that do show little recent growth. (For fintech fins, such growth has mostly been associated with increased RWAs, causing banks to be wary of taking on additional lending risk.)
Additionally, few companies that offer online-lending platforms have shown significant profits, and the path to profitability is not guaranteed. The most profitable players in the fintech universe have been the “techs.” But as Figure 2 shows, it has taken even successful fintechs from 8 to 14 years to become profitable.
In this environment, lending fintechs are entering a new phase, likely to be characterised by:
- consolidation, as established firms seek to enter new markets, increase their customer base and build scale;
- a quicker exit time from initial venture-capital funding; and
- blurring boundaries between fintech fins and more traditional banks (eg., obtaining approval for some banking services, obtaining a banking license, acquiring minority stake of a bank).
As these developments solidify, fintech leaders (particularly fintech fins leaders) are increasingly interested in the potential benefits of integration with the larger financial system.
Through such transactions, fintechs seek to improve their financial viability, attract more clients and, in some cases, obtain guarantees for deposits. They hope to play to their strengths, including the ability to offer an enhanced user experience and utilise advanced credit models, and take advantage of the flexible regulatory framework in which they operate.
These kinds of explorations signal fintechs’ desire to survive on their own and avoid threats such as customer fraud, cybersecurity and privacy breaches, and low profitability, but they’re also indicative of the kinds of vulnerabilities that open up fintech leaders to the idea of collaborating with their incumbent competitors.
Implications for Banks
Our analysis has found that banks’ revenues at risk from fintech competition are typically in the range of 2 to 3 percent from lower loan origination, lower net income, and fewer customers acquired. On the flip side, banks can gain a potential 3 to 5 percent in revenues by collaborating with fintechs, through enhanced customer acquisition, more fee-based revenues, better pricing accuracy and lower cost of risk.3
That’s because although fintechs may have struggled to grow profitably, they have been proficient innovators at every stage of the credit-banking value chain, from marketing, customer origination, and management, to collection, recovery, insolvency and the sale of debt.
By tapping that expertise, traditional banks stand to move much more swiftly and effectively than they otherwise could to introduce new products, streamline processes, enhance customer experience and increase revenues.
For example, banks could define new credit products and collaborate with fintechs to supply them – e.g. by issuing an RFP for end-to-end provision of a micro-credit capability. This would allow the collaborative fintech platform to develop away from some of the barriers to innovation scaling inside a company, but leverage the commitment and support of a bank, plus clear guidelines on regulatory and risk parameters.
Specifically, banks may be attracted in five key areas to enable better selectivity, predictive ability and portfolio quality. The option(s) they pursue – among internal development, acquisition, and partnerships – will depend on their status and on the maturity of the fintech offering in the area under consideration.
Customer Analytics: Many traditional banks have been stymied in their efforts to boost business strategies by leveraging big data and analytics. Many have multiple databases that have not been integrated and limited skills (data scientist expertise) to bring to bear.
Banks can, of course, set a course to develop better capabilities on their own by assessing big data needs, taking steps to integrate data and recruiting data scientists. But they could also acquire or partner with a fintech as a means to embed big data and analytics into all core business processes more rapidly. In this way, they could move more efficiently (and potentially, less stressfully) towards becoming a data-driven organisation.
Comprehensive credit scoring: Many banks’ scoring models are not tailored for specific products or segments. Moreover, these models are primarily designed for (and focussed on) the retail/private sectors, leaving desirable markets such as students and micro-, small, and medium-sized enterprises (SMEs) underserved. In addition, many banks have yet to apply adaptive technologies such as machine learning, to credit scoring.
[su_pullquote]Many fintechs have developed flexible and comprehensive scoring algorithms based on big data, artificial intelligence and unconventional information to evaluate creditworthiness and process continuous risk-related knowledge.[/su_pullquote]
In contrast, many fintechs have developed flexible and comprehensive scoring algorithms based on big data, artificial intelligence and unconventional information (e.g. network quality) to evaluate creditworthiness and process continuous risk-related knowledge.
Banks can start to assess the potential of accessing fintech capabilities in this area by conducting a comprehensive internal assessment of their own credit-scoring capabilities, and considering the ways in which existing IT, risk and credit-scoring capabilities currently operate and might be better linked. However, acquiring or partnering with a fintech can be a viable alternative path (and a good opportunity) if the bank can address such key critical factors as compliance issues and the implications of the potential loss of exclusive ownership of structures and databases.
Providing a fully digital customer journey: Most banks still rely on traditional points of contact (typically, their branch systems) and greet customers at the front end with standard functionality and solutions.
In this area, banks should consider leveraging the online digital solutions offered by fintechs, inspired by GAFA-like (Google, Apple, Facebook, and Amazon) customer experiences. These are characterised by user-friendly interfaces and fast online end-to-end processes that guarantee customers consistent and continuous interaction. Pursuing such a strategy should also accelerate the bank’s internal evolution, by streamlining direct engagement of the bank’s internal IT groups. These groups are generally busy keeping existing processes in tune, and are thus limited in their ability to muster the resources, time or expertise to get ahead in this area.
Integrating digital customer journeys: Banks’ IT solutions often lack continuity from group to group and few banks have undertaken deep, enterprise-wide IT transformations. Thus, few banks offer customers an integrated digital experience that includes comprehensive end-to-end solutions.
In contrast, many fintechs have developed digital applications that serve as a central hub for all existing products/services, or act as a virtual marketplace. In the case of peer-to-peer lending, for example, such an approach can enable hybrid-lending strategies and match borrowers’ and investors’ risk preferences, to originate loans that would otherwise be rejected.
To gain these abilities, banks should survey what fintechs have to offer; it may be faster and less expensive for a bank to obtain some needed capabilities externally to optimise credit processes overall.
Portfolio management: Fintechs can maximise value from asset rotation so as to generate funding for new loan origination and to enable a continuous and easy-to manage selling process. To enable fluid portfolio management, they rely on an integrated origination and securitisation structure.
Banks have much to gain from collaborating with fintechs in this area. To do so, they should consider undertaking a sensitivity analysis of their portfolio, and examining best practices in lean asset disposal (while maintaining a focus on compliance issues). Moreover, banks can look to tailoring deposits using pricing to match the requirements of asset rotation more specifically, as a peer-to-peer player does.
Developing and executing a partnership strategy
Many banks have created new organisational models in the credit area on their own, often forming new units to handle credit data analytics and credit data quality management. However, as Accenture Chief Strategy Officer Omar Abbosh has said, “For long-established or traditional firms, finding ways to scale innovations to become materially successful is extremely difficult. That’s why incumbent companies are vulnerable to disruption from new entrants.”
[su_pullquote]Collaborative strategies can lead to better outcomes for banks and for fintechs by helping both develop and refine productive ways to evolve.[/su_pullquote]
But new entrants can and do face considerable hurdles as well, as we’re seeing. While fintechs have made significant inroads into financial services markets, the reliability and capitalisation issues they’re facing have opened up mutually beneficial alternatives to direct competition.
Collaborative strategies can lead to better outcomes for banks and for fintechs by helping both develop and refine productive ways to evolve. And banks, in particular, should consider such strategies as viable opportunities to grow revenues, optimise processes, and become data-driven organisations.
About the Authors
Elena Mazzotti (left) is a managing director for Financial Services at Accenture.
Francesca Caminiti (right) is a principal director with Accenture Research.
1. Accenture Research analysis based on CB Insight data.
2. Accenture Research analysis based on Company data. Analysis done on 8 cases of Traditional Banks, 3 cases of Direct Banks (mBank, Bankinter, Fineco) and 2 cases of Lending Fintech (Lending Club, Lending Tree).
3. UBS Limited, Q-Series Report, “Global banks: Is FinTech a threat or an opportunity?”, 26 July 2016.