FinTechs worldwide have now reached the potential of substituting almost any service from the banking value chain. The legitimate question being raised is: if there is a startup for each service a bank provides, do we really need banks? Banking has been and is a massive machine providing comprehensive financial services. Any bank nowadays can serve any financial need for the eligible population. The word 'eligible' plays an important role here. One of the core differences in approach to financial services between banks and FinTech lies in democratization. FinTechs often aim to serve a noble goal of global financial inclusion and making financial services more accessible for those not fitting into the credit score-based estimation of eligibility for another loan.
Certainly, any venture also serves the goal of making a profit, and FinTech is no exception here. FinTech companies don’t have the luxury of almost infinite funds that major banks have, which leads to the necessity of attracting investments. Any investment aside from the benefits of company growth and technology development brings a burden of the necessity for a financial return. So there are no illusions regarding FinTech—it is still a venture desired to be profitable.
Putting aside the profitability factor, in 2016, FinTech will become an extremely powerful vehicle that might be able to eat up even more of the banking profit than it ever was able to. The fact that most of the major banks have lately been involved with FinTech in various ways speaks to the realization of that threat.
In fact, FinTech has become so hot that in December 2015, FinTech companies around the world raised almost a billion dollars. Moreover, January 2016 was even more fruitful as an extra $7 billion went into the FinTech large pocket.
While banks have always been looking to control the financial services industry, with the rise of FinTech, the situation has changed drastically. Now, banks are looking to collaborate with FinTech so as to not to lose the links in the value chains that make them so powerful. An example here could be Bank of America that recently was reported to collaborate with Viewpost to solve the cash flow problems of small businesses. BofA also aggressively files blockchain-related patents to secure its position in the industry, getting ready for the time when blockchain massively conquers the market. Moreover, the bank is willing to part with $3 billion to invest in promising FinTech startups.
Another financial industry giant, Amex, is exploring the payments segment through American Express Ventures, the company’s dedicated investment fund for investing in FinTech and related startups. AmEx has always focused on international payments companies. Most recently, AmEx invested in the Mexican equivalent of Square, Clip. Clip’s first partner is American Express, which represents 30% of the total payment volume in Mexico, but has only 3 million of the roughly 30 million credit and debit cards in use in the country.
There are many more examples of collaboration in various segments, but that is not the focus. What is important here is that major institutions are going after the FinTech startups that are able to facilitate or substitute certain services in their value chain in a more cost-effective manner. If we were to decompose a bank, there would be a FinTech company that can substitute each service the bank provides. However, a single ‘problem’ remains – banks are still holding our accounts. In the most fatalistic prediction, a bank would be a back-office organization maintaining an account, which is utilized by various FinTech companies providing their services. So we still need a bank, but not for the reasons we needed it ten years ago.
There are FinTech companies firing up payments, lending, PFM, remittance, etc. As you can see from the simple chart above, a bank customer can receive almost every service the bank provides from a wide range of FinTech startups. And many of them were extremely successful in stealing high-margin services from banks. One recently launched mobile banking startup Pocopay even debates the necessity of banks at all, sharing in its blog, "We are bankers who believe that people don't necessarily need banks, but people still need banking. We are also designers and engineers who believe that there is no excuse for complicating everyday things with an outdated design. Bringing together the old and the new, inspiration from the young, and lessons from experienced bankers, we have built Pocopay."
An average customer may not know, but there are at least 20 successful FinTech startups powering banks. With those companies, banks are able to significantly cut the operational costs by moving certain parts of the business out of the house.
DemystData is one of the examples. The company provides comprehensive profiles and refined customer predictions to help financial institutions optimize customer interactions. Founded in 2010, the company was valued at $33.3 million last year and powered more than 375 million transactions through comprehensive evaluations with more than 5,000 attributes from more than 150 sources. Among the company’s clients are Citi, Accion, Avant, SingTel, and others. The company has screened more than 300 million customers.
Figo is another interesting example. Figo banking API enables developers, startups, and banks to connect to every financial service provider. These partners can access every bank account (current, savings, loan, securities, etc.), credit card, e-wallet, and other financial services through one single REST API. The company is valued at $5.19 million, with 30,000 active users.
FinGenius also stands out as it is a bank-grade platform that combines artificial intelligence, machine learning, natural language processing, and human-like reasoning to simplify interaction with complex data for banks and insurance companies. Among its clients are BMW and Panasonic. The company participated in FinTech Innovation Lab London and received support from banking giants like Bank of America Merrill Lynch, Barclays, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Lloyds Banking Group, and others as one of the most promising startups.
And there are many more examples proving that over time banks may become sort of ‘warehouses’ bringing together FinTech startups to serve each particular need of a customer. Even in that case, however, banks will still be an immense part of our lives as they bring expertise and experience, making customers confident in their financial security.
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