In his annual letter to shareholders (Apr 2015), Jamie Dimon, the famous JP Morgan Chase CEO, wrote: “Hundreds of startups with lots of brains and money were hard at work on alternatives to traditional banking”. Times have changed. To date, incumbents and startups have learned to collaborate as well as to compete, according to the circumstances. The following blog will deal with effective relationships between FinTechs & Incumbents.
Why do FinTechs need incumbents?
- Capital: Let’s take for example, alternative lenders. Once they reach a certain volume, they will need financial institutions for raising capital for debt. SME lender BlueVine has secured a $200 million credit line with credit Suisse in 2018.
- Trusted-brand: A niche InsurTech like Trov distributes policies via giant Australian Suncorp.
- Customer base: Client acquisition is very expensive. An innovative boutique investment firm will hugely benefit from access to incumbents’ clients, to distribute its products.
- Infrastructure: Incumbents have a solid regulatory framework in place. Building such a framework is very costly and slow. It explains why the digital bank Moven, chooses to leverage Canadian TD Ameritrade license, rather than going through the licensing process itself.
Why do incumbents need FinTechs?
Top tier incumbents have the means and sometimes the motivation to build innovative products and services themselves rather than collaborating with FinTechs. As an example, Vanguard, Charles Schwab & Fidelity have all chosen to build their own versions of robo-advisors, to compete with the challengers: Betterment & Wealthfront. Other incumbents like UBS and Wells Fargo have chosen to partner with FinTech Sigfig, while Blackrock has decided to acquire FutureAdvisor.
Smaller tier institutions have always relied on large independent software vendors (ISVs) as their technology partners. The emergence of FinTechs was an opportunity for incumbents to:
- Improve their agility in delivering new products & services.
- Get quicker access to solutions being developed by highly skilled technologists and data scientists.
- Rejuvenate their culture.
However, the above mentioned ‘win-win’ opportunities are not so easy to exploit. There’s often a cultural wall between the young entrepreneurs and the enterprise employees. This wall is lower for mature FinTechs and for those founded by enterprise veterans. Innovation teams were created by incumbents to facilitate collaboration. Those have put in place infrastructures and processes for efficient collaboration. Their level of maturity varies significantly between organizations.
Probably the “easiest way” to collaborate is capital. Goldman Sachs, Citigroup, and JP Morgan Chase & Co are the most active US bank investors in FinTech (by number of portfolio companies). Banco Santander leads as Europe-based investor bank. As mentioned before, banks are not only involved in venture financing, but also provides capital for debt. Large insurers have also increased their investments in InsurTechs as indicated by MunichRe’s recent investment in Israel-based Next Insurance.
Another vehicle for collaboration are various innovation programs and challenges run or sponsored by incumbents, as well as by consulting firms and ISVs (e.g. Zurich Innovation Championship). Despite the inflation of programs, they are still widely used to match needs to solutions. A more recent trend is the establishment of corporate-funded foundries like Kamet by French insurer AXA and Venture Studio by Spanish bank BBVA or Anthemis.
Lastly, fueled by the emergence of open banking regulations and by incumbents’ search for innovative business models in the digital age, we are witnessing the establishment of ‘Appstore-like’ initiatives for FinTechs like BBVA’s open marketplace, Fusion store by Finastraand Temenos marketplace. The value for startups is clear: large exposure to customers. On the corporate side it is an opportunity for providing value-added services, enhancing client satisfaction as well as generating new revenue streams.
Axell, Accelerating Digital Transformation in Finance & Insurance
Tapping into our long-term track record, at Axell we facilitate collaboration among our network of enterprises and technology partners. We structure and build innovative digital businesses for our clients through effective collaboration with our technology partners. We focus on Israel’s innovation ecosystem and enable various types of engagements, as described above.
Yours truly – Lyron || Follow us on LinkedIn