David vs. Goliath: The Struggle of Fintechs in a Traditional Banking World

Dr. Ozan Ozerk

We talked with Dr. Ozan Ozerk, founder of European Merchant Bank and fintech giant OpenPayd, on the struggles of emerging fintechs in a traditional banking environment. 

Compared to the new fintech companies and the so-called “neobanks” on the market, traditional banks can sometimes seem slow when it comes to offering new services and onboarding new businesses. And yet, it doesn’t seem like the fintechs have stolen the thunder from legacy banks. Part of the explanation for that is the reliance of fintech companies on the existing infrastructures dominated by the bigger legacy clearing banks.

To explore the issues fintech companies are facing, we sat down with the founder of European Merchant Bank and fintech giant OpenPayd, Dr. Ozan Ozerk. Today, OpenPayd employs more than 100 people in six international offices, with more than 200 global corporate clients. As a serial fintech entrepreneur, Ozerk knows better than anyone the systematic challenges of navigating a complex global banking environment. 

So let’s start with the traditional banks. Why are they falling behind in terms of accepting FinTechs and new online services?  

Dr. Ozan Ozerk: The reason is first of all commercial. Most banks, when they do a risk vs.  reward assessment, conclude that banking fintechs are not worth the risk. The first big challenge is the regulatory requirements. Banks have to navigate a rigorous regulatory landscape. This is a landscape which is getting more and more challenging, both domestically and internationally. It’s very costly for a bank to keep up with the changing regulatory requirements. Any change in the bank’s existing business model or activity would often result in increased cost in the banks risk and compliance departments.

The second challenge is the technology. Fintechs require their banking partners to be able to serve them through up-to-date technical integrations and protocols. Unfortunately, most legacy banks don’t have such technical infrastructure in place to provide embedded financial services. Developing it would take lots of time and be very costly.

The third challenge is the commercial part. We already established that providing services to fintechs would need additional investment in the regulatory and technical departments of the bank, and often result in an increased reputational risk for the bank as well. So, naturally the bank would look for commercial terms that can justify such investments and risk. Unfortunately, the operational and commercial terms given to the fintechs by the banks often are such that the business model of the fintechs cannot sustain. End result; fintechs end up not being banked. 

What about fintech companies? What makes them more competitive? 

Dr. Ozan Ozerk: Fintech companies often have a more focused product offering, greater expertise and better technology to make their services more efficient and accessible to businesses and individuals. For example, if you want to open up a traditional bank account it can take days, even weeks. The onboarding process is still very much manual and far from consumer-friendly, compared to neobanks such as Revolut or Viva Wallet.

The same goes if you want to get your trade account set up with your existing bank. It often takes days. However, at fintechs like eToro or N26, it’s instant. The same principle can be applied to lending. It can take days to obtain a credit score. But many new lending apps will do it in seconds. By focusing on a niche market, lending institutions can provide better loan terms – and even approve loans to consumers who would otherwise get turned down by a traditional lending institution. 

But isn’t it in banks’ best interest to stay competitive? They certainly have the capital to invest in technology, so why are they ignoring this potential? 

Dr. Ozan Ozerk: The traditional banks are up against 1000’s of new fintechs – and their numbers are growing by the day. This creates a highly competitive landscape. Many of these fintechs are run by very tech-savvy people and the founders often have great market knowledge, knowing exactly how the product must work in order to outcompete the legacy banks. They’re also agile, and able to adopt fast to secure their success.

So, the question shouldn’t really be why a traditional bank isn’t competing against fintechs, but rather why traditional banks aren’t taking a position to act as the main facilitator for fintechs? 

Traditional banks have a unique opportunity to embed themselves into the core of a fintech’s offering. Not only by providing the payment rails, FX-services and similar, but also by acting as a marketplace for the fintechs. Allowing the bank’s own audience to benefit from the offerings of 3rd party fintechs. 

Why is it so difficult for new fintechs to grow?

Dr. Ozan Ozerk: Let’s presume access to capital and human resources are not a limiting factor. Then I would say the main problem of the financial industry is two-fold.

First of all, regulation isn’t keeping up with the market needs. Innovation is taking place at such a fast pace that the various regulators can’t keep up. The latest example of that is being seen in the cryptocurrency space. Various regulators are acting in totally different directions, doing everything from banning to regulating it. So if you were to set up a cryptocurrency-exchange today you would not only need to have a great understanding about your local regulation, but also a great understanding of the general financial regulations, the rules of the payment card schemes and the various APMs etc. 

The second key reason why fintechs struggle to grow is lack of adequate banking services. Most fintechs are chronically undeserved by their key banking partners. This is a serious issue.

Can you give me an example of the second problem? 

Dr. Ozan Ozerk: Well, imagine you’re a new fintech focusing on remittance services, but your key banking partners won’t allow you to send money into Africa or Asia. Or that you’re running a small neobank in the UK, but you don’t have access to GBP – only Euro. Odd as it may sound, this is unfortunately the reality of many fintechs.

How do challenger banks like European Merchant Bank and new regulations such as PSD2 fit into all of this? 

Dr. Ozan Ozerk:  Fintech companies in Europe are benefitting from open banking, which is regulated by the PSD2. It gives the various central banks of Europe the capability to open up for direct deposits, reducing the dependency of the fintechs on traditional banks. It also gives fintechs access to initiate transactions from their competitors and get access to account information. All in all, it enhances the competitiveness of fintechs and reduces some of the barriers they have been faced with in the past.

Banks like European Merchant Bank (Em.bank), Banking Circle, InCore Bank and Silvergate  are providing fintechs traditional banking services, but in a fintech-friendly way.

What would you describe as being fintech friendly and what are the consequences of overreliance on legacy banking? 

Dr. Ozan Ozerk: Being fintech-friendly is first of all about a mindset that embraces innovation – and the intention of the financial regulator. Being fintech-friendly is also about understanding technology and the issues your clients are trying to solve. 

By having a good understanding of the regulatory environment, a high level of technical knowledge and a business model built on cooperation, banks like EMBank or Silvergate are providing banking services to fintechs, enabling them to grow.

When it comes to overreliance on legacy banks I want to view it from both a consumer and business perspective: From a consumer point of view, reliance on legacy banking can often mean reduced access to services or a higher cost of services. 

If you’re a Polish worker in London today, it is highly unlikely you’ll be able to open a bank account to receive your salary at a traditional high street bank. If you however manage to open one, the terms you’ll get from a high street bank isn’t even close to the beneficial terms a neobank would give you. So, signing up with Starling Bank or Monzo would be far cheaper and faster than the brick-and-mortar banks.

From a business point of view, most high street banks will refuse to bank you because they don’t want to bank the industry you’re in. For most e-commerce businesses and financialinstitutions, being rejected by a bank is more the rule than the exception. If you somehow get to open up an account at a high street bank, chances are that you would pay much higher fees and get access to lesser services than at Tide or Clearbank. 

Can you also explain how OpenPayd’s embedded finance solutions can help in this case, apart from providing infrastructure for cross-border payments? 

Dr. Ozan Ozerk: OpenPayd offers all types of B2B banking and business payment services. The way these services are provided are often referred to as embedded finance or Banking-as-a-Service (BaaS). BaaS enables not only financial institutions, but also non-financial institutions, the ability to provide banking services. OpenPayd provides the software through a single Api and the regulatory foundation for various businesses in order to get them properly banked. At OpenPayd, we genuinely consider ourselves as pioneers at embedded financial services.

I have seen many cases where a business reaches out directly to a high street bank and gets rejected. However, by plugging into the OpenPayd platform, the same business can be indirectly banked by the same high street bank that rejected them in the first place. This is possible because OpenPayd acts as an intermediary, covering the regulatory part and thereby reducing the risk for the bank, as well as securing a great technical service level.

Also, as a small fintech, your turnover might not impress a high street bank enough to take you onboard. Or even with great figures your business model could be seen as too risky for them. However, when you sign up with OpenPayd, your small turnover  would become a part of a much larger transaction volume OpenPayd transact with the bank. Therefore, your single business – otherwise deemed high risk by the high street bank – would be balanced out by OpenPayd’s other lower risk clients. This blended profile suits the bank’s commercial expectations and risk profile greater.


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