Industry attitudes to collaboration between fintechs and banks in the payments space have turned a corner in recent years. bobsguide sat down with Tony McLaughlin, Managing Director at Citi’s Treasury and Trade Solutions and Nick Pedersen, Managing Director, EQ Global, to discover how banks and fintechs are partnering to generate new payments propositions.
What is the relationship between EQ Global and Citi?
TM: The relationship started in 2006. Paymaster 1836 (one of the companies which merged to form Equniti) specialised in paying private and occupational pensions and Citi had just won the mandate from the UK Government to make pension and other payments to retirees overseas. Paymaster was paying many of the same beneficiaries, so we decided to join forces on international pensions payments.
Citi also formed a relationship with Lloyds Registrars around cross-border dividend and share plan payments. These two relationships came together under the Equiniti banner when those companies merged.
Then a market opportunity was identified in the UK SME market, where foreign needs are not always well served. Citi has a clearly defined and limited target market centred on larger enterprises so we were not able to reach into the UK SME space directly, even though we had superior product capabilities. That’s when we formed the relationship with EQ Global, through a contractual structure where EQ Global would be the front-end of the business supported by our global network, and enter the marketplace as a next generation transactional foreign exchange provider.
This is a perfect example of a fintech working with a bank; where two different organisations come together and do something that they couldn’t do individually. There is no reason for EQ Global to replicate the foreign exchange dealing or the payment processing that Citi performs at global scale.
By the same token Citi found it difficult to reach all the market segments that our capabilities were applicable to. By marrying the capabilities, the domain expertise, and the market reach, we created a completely new business that was primed for growth.
Has the partnership developed in the way you expected to when the deal was first signed?
NP: When I became involved in the partnership four years ago the thought was that EQ Global could provide competition to some of the major cross-border payments companies, and go after traditional core SME payments. The result of changes in the digital economy is that our front-end technology, added to Citi’s network, is quite compelling; it’s not just a payments network anymore. We can turn around development in a couple of weeks and solve a very narrow problem for a very particular sector e.g. global payroll.
Are there any banks and fintechs that could or should be looking at this relationship model?
NP: I think most banks would be wise to find a small number of specialised partners to work with, rather than the approach of partnering with 150 fintechs and seeing which technology works. The approach Citi takes, which I think is the better one, is a focus on a smaller portfolio that the bank can really work closely with. We are looking for feedback from Citi on the products we are developing because they see the high level macro trends in the market and we see the minutiae. When you put those perspectives together you can create something quite powerful.
Does the integral nature of your relationship with Citi preclude you from working with other partners?
NP: When we are focused on building products it is preferable to not be burdened with a dozen customer relationships to nurture and satisfy. Every bank will always want to do more business with you if you are performing well and it is much easier to do that when you only have one or two banks that you work with. So the relationship with Citi may preclude us from working with other banks, but that is not something I am missing.
What are the characteristics of fintechs that the bank looks for when seeking out new partners?
TM: We partner with fintechs in a number of different modes. We have a Citi Ventures arm, which acquires minority equity stakes. Here we’re looking for businesses that offer a unique capability that we don’t already have ourselves, or a business that can take us into markets that we can’t reach ourselves.
We also have several innovation labs where we co-create with fintechs, and we run the Citi Mobile Challenge and the Citi Tech for Integrity Challenge to engage with fintechs through thematic competitions.
From a business perspective, we’re quite selective about the partners we work with. Citi’s compliance requirements are high; we can only work with companies we believe are very high quality counterparties. We also examine opportunities through a commercial lens by asking who we think can be successful in a highly contested field.
Apparently 40% of all fintech is payments, and there are hundreds of start-ups in any given niche. We like to work with people who have differentiated value propositions.
Having worked for both a bank and now a fintech, do you believe that you have a unique perspective of how banks and fintechs should collaborate?
NP: Being on the banking side trying to identify differentiators within fintechs gave me a good insight on where we could take EQ Global’s business, because that’s the really crucial challenge that a fintech has. It’s not so much about forming that relationship, it’s how you make the most of it once you have the doors open to a bank like Citi – you don’t want to squander it by spending years building products that no one wants, so the trick is to decide quite quickly how you are going to differentiate yourselves and build something the market needs.
Do you think that one of the reasons fintechs and banks have been so combative in the past was that neither could see the industry from the other’s perspective?
NP: If you look at a lot of the more aggressive fintechs that have been anti-bank and not that collaborative, they tend to be run by consultants; very few are run by bankers. Or serial entrepreneurs that enjoy disrupting legacy systems and see banking infrastructure as something to be disrupted. I think what they are realising now is that to really achieve scale they are going to have to rely on banking infrastructure, and that is not going to go away overnight.
There is a trend of more and more bankers going into fintech and I think that is an element that is changing that attitude to collaboration. There will always be fintechs that are out there and designed to disrupt banks and take them down, but the trend is moving towards the model that we operate.
TM: EQ Global and Citi have built a business together that we are scaling and that the clients find value in – so we have found a common opportunity that we approach from a single perspective and there is no clash of interests.
There are many fintechs that are absolutely reliant on riding on banks‘ rails, but they may find their access limited. In cases of perceived market failure, regulators then step in to force banks to open up and allow non-bank competition to flourish.
The full interview with Tony McLaughlin and Nick Pedersen will be published in Payments R[E]volution magazine, published later this month. Sign up to our sister site PaymentEye's newsletter to find out more about this publication