The race to market domination is well and truly underway as fintechs rub elbows with established banks in the payments space.
And the ideal conditions for fintechs seem to be converging to label 2019 a make or break year for the banks.
From the regulators, a year on from PSD2, fintechs are now able to combine more and more insights from valuable financial data with technology stacks that are unencumbered by legacy constraints.
Likewise, Open Banking is pushing an increased interest in the API culture (application programming interface) - improving the connectivity and standard around the flow of data between companies.
That spirit of connectivity has also led to various partnerships as fintechs seek to own more of the value chain, with Goldman Sachs reporting that 2018 was the year for paytech M&A.
Combined – regulation, technology and a collaborative mentality – all place one buzzword above them all: platformification. Sitting across two or more functions within the payments value chain, 2018 has seen a propulsion in their proposition, and a renewed threat to the historic dominance held by the banks.
While the list of paytechs encompassing two or more payment functions continues to grow, the size and significance of certain players is also expanding rapidly, namely the household name of PayPal/Braintree, as well as contenders, Stripe, iZettle, Square and Adyen.
How fintechs overtook the banks
A glance at market cap per employee quickly demonstrates the acceleration seen by these companies in 2018.
Market cap per employee
(source: Chris Skinner for 2018 figures, citing Geoffrey Parker’s Platform Revolution, 2016)
This graph demonstrates the dramatic change to market cap/employee numbers at two established financial institutions (Barclays, est. 1692, Deutsche Bank, est. 1870) versus Stripe, PayPal and Ant Financial who have all maximised return on investment and created new revenue streams by platforming themselves by opening up their APIs.
As per below, PayPal were able to shore up their P&L after introducing their X commerce API and mobile API to be seamlessly introduced into merchant and payment chain players’ back offices.
(Source: Chris Skinner)
More telling perhaps is the rapid rise of Adyen, the Dutch paytech, that has inserted itself over various functions of the traditional platform, making it far cheaper, convenient and technologically more agile for merchants, while replacing the role of traditional acquirers and processors.
Ebay recently announced that it would migrate its entire payments infrastructure over to Adyen by 2021.
The new decision maker, the developer
The success of the paytechs may very well boil down to a simple premise: they are a developer’s dream. Adyen is providing out of the box solutions for everything from omnichannel POS management, customer insights, multi-currency acceptance, while Stripe has owned the space for quick and easy integration via a suite of easy to use APIs, onboarding merchants quickly, and now looks to move into card issuance as merchants seek to issue their own cards to avoid interchange fees.
When cloud capabilities are added to the mix and the ability to access services anywhere, at any time with real-time data, it is not hard to see the attraction for merchants versus the slow, expensive and laborious onboarding process at their preferred bank.
The banks fightback
PSD2 is forcing ever closer industry-wide collaboration, with tier two and three banks looking to partner to differentiate themselves in a highly competitive ecommerce and payments value chain which they themselves can orchestrate.
Likewise, on the technological front, while banks may not be able to easily circumnavigate their legacy systems, they do have access to the same emerging technologies currently being leveraged by the fintechs, such as TAS Group’s cloud-based CARD and cashless 3.0 payments platform, one of the tools it is providing to the banks to help them fight back.
The answer may be an old call to arms, but it is one that deserves to be reiterated. Banks should focus on their key assets, namely rich historic customer data and customer trust, and copy fintechs in their ability to understand and satisfy their clients’ expectations.
The stark reality of the fintech-heavy payments value chain no longer means that banks can build out to differentiate, rather they must look inwards and focus on their core proposition and leverage technology, embracing the “platformification” paradigm (Banking as a Platform/Banking as a Service model).
What is needed is a complete change in mindset and the support of the right partners/suppliers.
Bank agility is possible in the short term, but only if they focus and apply technology to their unique assets, to build best in class customer experience to wrestle control back from the fintechs.