David Gardner, Partner at UK law firm TLT
There has been a rapid increase in the size and number of investments into UK fintechs with the likes of Monzo and Revolut leading the charge. Interestingly, it is not just the VC funds driving this; banks are also investing or in many cases, acquiring fintech companies outright.
While you could argue that this is a short-term, tactical move by established financial services institutions, it does appear to be part of a longer-term play – supported by a number of key market drivers and with plenty of good reasons to believe that this trend will continue.
Indeed, when we surveyed banks and fintechs in August 2018, two thirds (66%) believed that the market will become more consolidated as larger banks acquire fintechs and smaller banks to keep up with the level of innovation and speed of product development required to remain competitive.
To highlight just a few recent examples of investments, Spain’s BBVA has acquired a string of digital upstarts including Simple in the US, Atom Bank in the UK and Holvi in Finland. Barclays has led a £10m funding round in Bink and a $6m round in Simudyne. Barclays has also established Rise as a national network of accelerators for entrepreneurs in the fintech industry.
In Asia, Standard Chartered has teamed up with China’s Alipay to launch a digital remittance service, using blockchain technology to send money across borders quickly and cheaply. The list goes on.
A Continuing Trend
There are a number of reasons why we expect this trend to continue:
- Market Disruption
Established lenders and financial services companies face increasing competition from new market entrants, including digital banks, challenger banks and fintechs. As demand for digital banking grows, these businesses are offering new service propositions, disrupting the traditional banking model and shaking up how we bank and manage our finances.
In addition, our latest research reveals that GAFA (Google, Amazon, Facebook and Apple) is actually the biggest perceived threat to banks and fintechs despite them not having a substantive banking presence in the UK yet. Two thirds (63%) of banks and half (45%) of non-banks perceive GAFA as a threat to their business.
The tech giants have already shown an appetite to disrupt the financial services market and have gained a toehold in the payments space via popular services like ApplePay and AndroidPay. More recently, Apple has launched a credit card with Goldman Sachs.
A lot of this competition is being driven by regulation, with the Competition and Market Authority’s open banking regime now fully underway. This is enabling more FCA-registered companies to access customer banking data (via a secure interface with the major UK banks, and only with the customer’s consent) so that they can launch a range of new services, from data analytics and comparison platforms to financial management tools.
Existing banks are looking at collaboration and acquisition of fintechs in order to remain competitive.
As well as open banking, there are a number of other regulatory regimes and governance requirements, including the General Data Protection Regulation and requirements relating to the use of cloud computing, which affect banks and often require technology transformation as part of achieving compliance. In many cases, banks are investing in fintechs to bring the necessary technology and skills into their business, to help fulfil regulatory obligations and future-proof their business as these evolve.
- New Products/Revenue Streams
With new technology, banks are able to offer a broader range of products and services to new and existing customers, and open up new, previously untapped, revenue streams. For instance, analytics software can be used to detect when a customer’s needs change, allowing the bank to tailor and target specific products and services uniquely to each customer.
A new mortgage service offered by Royal Bank of Canada is a great example of how technology is being used to diversify an existing offering. It goes beyond the traditional ‘Welcome home’ hamper for new mortgage customers, offering to research neighbourhoods, move furniture, paint the house and even decide which bins to take out each week – all as part of its mortgage service.
- Cost Reduction
Back office administrative costs have already been greatly reduced in the last decade, but there is still an opportunity for fintechs to help banks save significant costs savings, which is driving some of these investment trends and motivating banks to move into this space.
The financial services market is changing rapidly, with three quarters (77%) of our research respondents describing the open banking reforms in 2018 as one of the most radical changes in the recent history of the industry. In the same year, the General Data Protection Regulation dramatically enhanced people’s legal rights over how their personal data is gathered and used, placing further legal and compliance burdens on banks.
At the same time, people are living their lives through an increasingly digitised world, and digital service delivery models are becoming a lot more familiar, common and therefore in demand. Consumers’ banking habits are changing all the time and the growth of digital banking is a self-fulfilling prophecy at the moment – the more digital services people become familiar with, the more this will be considered the norm and the industry will need to be agile enough to keep up.
With this scale of disruption and pace of change, acquiring fintech companies to remain relevant to today’s banking customers can often be seen as quicker and easier and therefore more desirable that developing proprietary technology in-house or buying technology off-the-shelf.
Customer retention and keeping pace with technology are top priority for every CEO. Not surprisingly, these concepts are complimentary, because the better the technology, the better user experience for the customer, leading to increased customer engagement and retention.
Investments by banks in fintechs will continue to be a necessity to stay relevant in the modern financial services world. It will be interesting to see how open banking and other initiatives drive further innovation in the market as it continues to mature.