Fintech – Partners or Competitors? A New Generation in Banking

Innovations in financial technology, whether initiated by banks, established technology companies or emerging fintechs, have the potential to transform the way we do business, and pave the way for a new financial services ecosystem. This brings both risks and opportunities, but by approaching technology innovation in a way that is constructive, collaborative and customer-focused, the opportunities can greatly outweigh the risks.

Diverse businesses, diverse aims

Technology has always been central to cash and treasury management, with well-established solutions developed by banks, ERP providers and specialist cash and treasury management system (TMS) vendors. Recently, however, we have been witnessing a wave of new fintech entrants, leveraging new technologies, rapid development practices and new opportunities offered by regulators to participate in the financial sector, such as PSD2. These companies are typically young businesses that can be nimbler than large banks and established technology providers, and approach challenges from a new perspective. 

Fintech has enjoyed a meteoric rise over the last few years, with around 12,000 fintech companies now active worldwide. Yet this number will eventually dwindle, as the majority of start-ups inevitably fail and those that see success are assimilated by larger banks. Indeed, the perceived threat of ‘disintermediation’ is, in reality, highly unlikely to materialise. Banks provide a wide range of critical services, such as secure, reliable payment services, FX and financing, on which customers depend to do business. Central to this relationship is trust, often developed over many years, and it is difficult to see how a typically small start-up business could dislodge this relationship. However, what fintechs do offer is a challenge to existing ways of working which has the potential to benefit both banks and corporations. Unlike banks, whose solutions approach the financial services value chain as a whole, and are positioned as one part of a wider customer relationship, fintech solutions are generally targeted at one specific service within the value chain, and therefore fulfil an enabling role. What’s more, banks’ financial heft puts them in an excellent position to facilitate the growth of fintech products, enabling them to devote far greater resources into refining and rolling out new solutions.

Combining strengths

So, while fintechs may play a ‘disruptive’ role in some cases, they are more likely to be enablers. Furthermore, banks and fintechs do not have the same strengths, or the same goals. The challenge, and indeed opportunity, is therefore to identify the customer use cases where fintech solutions can complement bank offerings, creating value for the bank, fintech(s) and most importantly of all, customers. We see considerable opportunity for banks and fintechs to work together to identify use cases, develop proofs of concept, integrate and commercialise solutions that are proven to add value to customers.

There is a variety of relationship models that could facilitate this collaboration: for example, banks may choose to invest directly in promising fintechs, while in other cases, banks and fintechs will form partnerships. These partnerships can take two forms: firstly, the two (or more) parties can collaborate to deliver solutions to customers; secondly, the bank can provide a fintech with the settlement capability to underpin their solutions, and therefore they become customers of the bank.

Irrespective of the form a relationship might take, banks need to be absolutely confident that fintech offerings that are provided either within or alongside their own solutions demonstrate the quality, integrity and security that customers rightly expect. Some fintechs will inevitably fail, as start-ups in every industry do, while others will lack the product integrity that critical business functions such as treasury require. At UniCredit, therefore, we have a dedicated unit to screen the quality and sustainability of potential fintech partners and work with them to pinpoint the relevant customer use cases for their solutions.

[[[PAGE]]]

Crystallising the value proposition

Through this screening and collaboration, we are discovering some highly innovative and potentially transformative solutions, both for wholesale and retail banking. In trade finance, for example, where there are significant challenges associated with large amounts of paperwork, new technologies such as blockchain will deliver value to exporters, importers and their banks by dematerialising, accelerating and reducing cost in international trade. In payments, too, we anticipate far more integration across the value chain, with the exchange of cash synchronised very precisely with the exchange of goods and services. Today, for example, payments are triggered by receipt of the invoice, while in future, delivery of goods and services could become the trigger.

While partnerships between banks and fintechs are key to the transformation of the financial ecosystem, there are other parties that are playing a crucial role. The first of these is, of course, the customer. We are already working with pilot customers as part of the proof of concept work alongside fintechs, and this contribution has been valuable to see solutions working in a real-life environment and crystallise the value proposition. For instance, we have already successfully completed two proofs of concept for blockchain-based trade finance initiatives in partnership with a fintech company, and are currently carrying out test payments using blockchain between two countries in Central and Eastern Europe. These proof of concept projects are shorter and more targeted than those of fully fledged bank solutions because the scope is narrower, the development and testing processes more agile, and the costs lower. As a result, while historically it has taken months or even years for banks to bring large-scale solutions to market, banks have far more appetite to embark on smaller, more cost-effective projects that experiment with new ideas and solutions, and accept that not all will be successful. A number of these projects are already showing very promising results, so as successful products resulting from bank-fintech partnerships are commercialised and rolled out, customers can be confident that these are tested, proven and sustainable.

This new approach requires a change of culture within banks. As was the case before the financial crisis, banks must once again become the ‘employer of choice’ for the talented young employees. Young entrepreneurs and creatives are more accustomed to experimenting with the new technologies in a ‘lab style’ environment, where failure is a normal part of the working ethos and a catalyst to become even better. Once a solution looks promising and addresses a real-life customer problem, it can be further funded. This marks a major change for banks, so acting on, and sustaining this culture shift will be a considerable challenge.

The wider ecosystem

The other key parties in the evolution of a sustainable, integrated financial services ecosystem are regulators and industry bodies. Organisations such as SWIFT, for example, have an important role in developing standards and encouraging collaboration through projects such as the Global Payments Initiative (GPI). This will enable banks to provide customers with same-day cross-border payment execution together with transparent, predictable fees and end-to-end transaction tracking. UniCredit is amongst the pilot banks for this initiative. Similarly, we are actively participating in proof of concept projects in blockchain, both within the UniCredit Group and as part of the R3 bank consortium.

Since the global financial crisis in particular, which resulted in a raft of new regulations, banks have had to direct a great deal of their energy and investment into compliance. The emergence of fintechs has been a catalyst to increase the level of innovation across the wider financial services industry for the benefit of all stakeholders. UniCredit has a long heritage of technology innovation, so partnering with fintechs, in addition to in-house technology development, is simply the next stage in this innovation journey. While there are inevitably risks associated with innovation, particularly when multiple parties are engaged, we are proactive in identifying and mitigating these risks, and creating opportunities for our customers to solve problems, improve efficiency and control, and transform the way they do business. We see the future as an integrated, data-driven financial ecosystem in which various players work together, building on their respective strengths, and delivering value in new ways.