Banks and financial services firms are harming the industry by attempting to go on a “startup safari” and invest directly in innovative fintech companies to get a competitive advantage, according to Starling Bank CEO and founder, Anne Boden.
Speaking on a panel at Money 20/20 in Amsterdam, Boden said new banks and fintechs get emails on a daily basis. “‘Can we bring our CEO in this afternoon to see you? He’s in town and happened to be coming in from Asia, can we bring him around to see what a new bank looks like?’ It’s like they’re taking him to the zoo.
“What we do have is the boards of these large institutions suddenly realising that this is real, that new banks are taking market share and doing things that have never been done before, and they’re having to take it seriously.”
According to an Accenture study, challenger banks in the UK market combined constitute around 14% of banking revenue. In Europe, €54bn of the €831bn made in profit by banks in 2016 was earned by challenger brands.
“What [banks are] doing is taking a little piece of the action and using it to learn,” added Boden. “But in many cases what is actually happening is these smaller organizations, especially in the prepaid space, are being used for information and when all of the information is squeezed out them they’re let go.”
Joining Boden on the panel was Leda Glyptis, CEO of core banking firm 11:FS Foundry. She said that there has been a lot of capital thrown around, encouraging the proliferation of startups in the market. “That’s a problem, because the market can’t absorb them. It’s damaging for the startup but actually also damaging for the organisation. You waste time, you waste money, you don’t ask the right questions.”
Also on the panel was Claire Calmejane, group chief innovation officer of Société Générale, who both agreed and disagreed with the points raised. “I think there is a maturity for incumbents when it comes to funding for partnerships. Everywhere we have worked we have always worked on fair partnerships, that they get paid for proofs of concept and aren’t doing it for free. We have to embrace this new way of business because if we do not do it we will be done [as a business].”
Big ideas on small investment
For Glyptis, talking about the technology and value being generated in the fintech space in the same breath as venture capital is misleading. I have seen incredible capabilities being built on quite small figures. The VC mindset is hedging and diversification, whereas from where Ann and I are sitting it’s about getting something to market. What the VC or the banker in the room is looking for is a very different definition of value.
The people who have built really powerful positions haven’t necessarily done so on the back of a lot of money. We’re realizing that a lot of the cool things that are happening either on the glass for the big organizations or in the B2C space, actually have to be supported by digital infrastructure that goes all the way down, and they’re teetering on top of precarious old systems.”
Boden added that it’s one thing for banks to come to conferences like Money 20/20, wear jeans and have conversations with fintechs, it’s another to set about changing legacy systems. “I've been in that world a long, long time, and it is the most difficult thing to do. In the current regulatory environment I wouldn’t want to be the CEO or the CIO that presses the button to migrate from the old system to the new. It’s too risky. It has been a career-ender for many a CTO and CEO.”
“We have different assets,” argued Calmejane. “As far as we can see it from an Open Banking strategy we have two businesses running. We have one finding B2B2C services. Some of our core competencies are not easy, and challengers will come to a choice of whether they should meet expectations and increase their cost bases. This is where the conversation around platforms is emerging. We’re already seeing consolidation in the US and in Asia. In Europe there is still a lot of competition, how long will it take? 15 years? 20 years? I don’t have a magic crystal ball for this. But the conversation around competition is not something I’m seeing.”