Technology, competition, and regulation have put pressure on banks to evolve from lumbering giants to nimble financial ninjas. The transformation of investment and retail banks from their bloated pre-financial crisis operations has been fraught with stringent regulation of their activities and challenges from newcomers. In particular, fintechs and fintech vendors have emerged on the scene without any reputational damage and many, without restrictions from the regulators. Fintech vendors, as both targets of M&A deals and service providers present threats and opportunities to retail and investment banks.
“Our analysis of data from 45 major banks over the last three years suggests that, globally, institutions remain principally focused on applications of fintech in payments,” reported Accenture in their investigation of how banks are engaging with new emergent technology firms. Not only are fintechs growing in size and sophistication, they are also prominent players in blockchain, datamining, compliance, and surveillance. Naturally, while payment technologies set the scene for dialogue between banks and fintech, other potential synergies exist.
Innovation and digitisation in banking is not new to investment and retail banks. Originally seen as competition in the marketplace, retail and commercial banks have toyed with the proposition of incorporating better payment technologies and platforms. Players in both markets see value in digitising both business and operations.
“The principal competitive challenge for entrants is that any innovation they develop must rely on established organisations who control the infrastructure and the value network of payments,” according to Tata Consultancy Services. For fintechs in the payment space, they have had to make use of existing digital cables and frameworks – Visa’s verification network, merchant POS terminals, and mobile phone networks – are amongst the most prevalent.
Hybrid fintech vendor and retail/commercial bank Starling combines real-time payment systems with traditional banking services. “If you can pay your staff or your suppliers quickly, people are probably going to say they prefer working with you,” said Julian Sawyer, Starling COO. Rather than work with outside fintech vendors the approach Starling Bank has taken is to become a fintech vendor and hybrid bank, and offer banking-as-a service to individuals and businesses. Starling, as a fintech vendor, allows other institutions to use its online bank as a white label service – showing how a retail bank can also be a B2B fintech vendor.
"Payments are the bloodline of banking. More and more global payments are executed electronically via fintech and online platforms," said John Gibbons, head of global transaction banking at Deutsche Bank.” Not being complacent, both investment and retail banks use M&A deals as a way to acquire payment technology. Deutsche Bank’s acquisition of cloud-based payment middle-man Modo Payments is a demonstration of its balance sheet power to buy vendors and their technologies.
While Deutsche Bank can leverage its vast balance sheet, other banks have created partnerships with low-cost FX transaction providers. Collaborations between firms traditionally seen as competitors have picked up. Leveraging off of the success of low-cost transfers, online retail bank Monzo has recently partnered with TransferWise in sending funds abroad. Partnerships like this can create significant cost savings between banks and fintech vendors by combining technology and market share from each party.
Retail banks while facing competition can also find opportunities to acquire fintech vendors offering simple products. Online mortgage offerings is one area where retail banks can use their purchasing power. As of August 2018, the lending secured against dwellings was valued around £24.5bn, according to UK Finance. The value of the UK mortgage market is around £1.1trn in total, a demonstration of the size and activity of the overall lending. The top lenders, are household names – Lloyds, Nationwide, Santander, RBS, Barclays and HSBC together take home 65% of the total market share.
Cracking the highly regulated mortgage marketplace to take on the high street names is challenging. More specialised than banks, firms like Assetz Capital and LandBay have redrawn the traditional mortgage landscape. Offering loans for refurbishment, bridges, and buy-to-let, landlords and property investors can bypass banks all together. Still small, LandBay has loaned over £190m; Assetz Capital offers ‘funds’ targeted at specific property types – while not yet overtly challenging banks the technology in peer-to-peer and quick-decision lending is attractive. Opportunistic retail banks with deep pockets could look to target fintechs themselves and vendors exploring property technology.
Investment banks and wealth management services have come to heads with robo-advisers. The technology, once reserved for rapid trading is now deployed in fund selection. Robo-advised funds currently account for around $2.2-3.7trn in assets under management – while still small compared with the size of the industry at $70 trillion, “by the year 2025, this figure is expected to rise to over $16 trillion in assets under management (AUM), roughly three times the amount of assets managed by BlackRock, the world’s largest asset manager to date”.
The relationship between investment bank wealth managers and fintech vendors is complex. One of the oldest names in wealth management and succession planning, Rothschild is using fintech vendors as a compelling investment choice. Rothschild recently backed fintech-only investment fund Augmentum. The fund manager exposes investors to fintech vendors and business models which could potentially disrupt industries and become leaders. Related to the bank, the Rothschild family has also raised private funds for Exo Investing an AI driven online wealth manager, illustrating how the wealth manager interacts with fintech vendors – as a stakeholder investor.
As a purchaser of technology, Rothschild Bank has also strengthened its customer offering by buying fintech solutions from Finantix. The strategy is to upgrade Rothschild’s sales tools, client access platforms, and administration – all in efforts to dedicate more time to actual banking activities. Like Rothschild, Santander has also expanded its market offering by partnering with robo-adviser Scalable Capital. Santander and Scalable Capital look to roll out a white label online investment platform, targeting retail clients with variable risk profiles. Purchasing technology from fintech vendors can be a short-cut to upgrading banking activities for firms planning on expansion.
“When we had some deleveraging - some quick, fast, and massive deleveraging like we had to go through after 2007-2008 and in 2011…The fact that we have strong operations help us to go through that more quickly and safely,” said Philippe Boulas COO of Financing Solutions at BNP Paribas on his decision to purchase Finastra products. Fintech vendors can look to deep-pocketed investment banks for mandates to improve systems, execution, and more recently, regulation. Investment banks typically look across their capital markets value chain at pre-trade, post-trade, and trading eco-system. Specialist vendors like Finastra offer transparency between asset classes, real time positioning and breakdowns of complex products.
Stemming from the onerous regulatory environment post-GFC, investment banks use regtech and AI providers as a means to leap-frog away from the manual and laborious work done by compliance specialists. Regtech and AI vendors use technology to interpret regulations and their application.
Fintech vendor Fenegro provides KYC checks compliant with regulatory reporting. High profile clients like Bank of China, Westpac, BNP Paribas, and RBS use the vendor’s systems. While not an investment banking client facing platform, Fenergo has recently partnered with Bank of China US, providing trade life cycle management in KYC, AML, and CDD (client due diligence).
In addition to know-your-client checks, fintech vendors like OneSumX can be used to handle liquidity and capital reporting. For firms to comply under the capital directive, OneSumX provides consistency across reconciliation and transparency in workflow. One of the key USPs of OneSumX is its regulatory update service – purchasers can be updated whenever regulations change. Banks like BBVA in the UK use the fintech’s ability to improve reporting and to use capital more efficiently.
Both purchaser of fintech solutions and investor like Rothschild, BBVA has also sought to break into the fintech market. As a strategic shareholder and collaborator, BBVA has made a direct investment in Atom Bank. Atom Bank, one of the UK’s mobile-only bank offers BBVA exposure to the growing digital marketplace. BBVA’s £30m investment gives it board-level influence in the digital bank.
Artificial intelligence vendors also find opportunities with investment and retail banks. Stress testing for financial forecasts, automated life cycle tracking and email fraud detection are key areas for AI and machine learning fintech vendors. Taking a global approach, UK-based CUBE gives Tier 1 and 2 investment banks an opportunity to purchase the vendor’s proprietary interpretation of regulation. Using AI, machine learning and natural language processing, the API can be accessed by users over the internet, providing a cost-effective approach to compliance.
Thematic across both the retail and investment banks, competition, acquisition and deployment of fintech vendors and services underscores the new relationship between technology and banking.
Capturing the essence of the relationship between fintech vendors and banks, one McKinsey consultant and industry watcher summarises that “You’re seeing everything from banks engaging with fintechs in a number of ways: partnerships, acquisitions, JVs, starting their own incubators or VC funds. It’s an evolving market, and banks are trying to digitise - fintechs are a good way to do that. Facing the digital challenge isn’t easy for many banks - apart from legacy systems and archaic processes, they simply don’t have the right capabilities and people to transform themselves. This makes partnerships with fintechs even more important.”