EME Outlook - - Contents - Writ­ten by: Igor Pe­jic, Head of Mar­ket­ing at BNP Paribas PF AT

Eval­u­at­ing the need for both com­pe­ti­tion and col­lab­o­ra­tion in the fi­nan­cial sec­tor

As tech­no­log­i­cal ad­vance­ments in the fi­nan­cial sec­tor con­tinue to ex­cel, a fine line

be­tween com­pe­ti­tion and col­lab­o­ra­tion is emerg­ing. Igor Pe­jic dis­cusses

Banks are in­creas­ingly pit­ted against fin­techs and their digital coun­ter­parts. At con­fer­ences del­e­gates are asked to group into in­cum­bents and chal­lengers, and the me­dia have feasted on the David versus Go­liath im­age too. But does that nar­ra­tive of op­po­si­tion hold true in re­al­ity?

The fig­ures give an un­equiv­o­cal an­swer to this. Ac­cord­ing to KPMG, fin­techs glob­ally pock­eted a record $57.9 bil­lion in the first half of 2018, the bulk of it com­ing from in­cum­bents. Ex­am­ples of suc­cess­ful co­op­er­a­tion are abun­dant. Blockchain fin­tech R3 re­cently re­ceived over $100 mil­lion from fi­nan­cial be­he­moths in yet an­other fund­ing round, while JPMORGAN pumped money into restau­rant pay­ments startup LEVELUP.

But what about the other side – surely it must be the goal of fin­techs to dis­rupt the fi­nance in­dus­try, for which they need to be in­de­pen­dent? Not quite. A sur­vey among fin­tech de­ci­sion mak­ers query­ing them about their ma­jor cor­po­rate goal re­vealed that three out of four strive for co­op­er­a­tion with es­tab­lished in­sti­tu­tions. Look­ing to their role mod­els, this comes as no sur­prise. Even PayPal, the fin­techs’ poster child, re­lies on a wide bank part­ner­ship net­work. It sim­ply adds a layer on top of the ex­ist­ing fi­nan­cial sys­tem.

The tricky re­la­tion­ship

Digital banks or neo-banks are a par­tic­u­lar type of fin­tech – namely one with a bank­ing li­cense. This means they not only fa­cil­i­tate pay­ments, but also hold their cus­tomers’ money. In this sense, un­like many other fin­techs that are merely tech­nol­ogy providers, digital banks are com­peti­tors.

Upon first glance, there is not much pos­si­bil­ity to part­ner with tra­di­tional banks as both groups are vy­ing for the same cus­tomer groups. The most fa­mous ex­am­ples – N26, Monzo or Revo­lut – are clas­sic op­po­nents, usu­ally pro­vid­ing the same ba­sic ser­vices with a no-frills ap­proach. Ber­lin-based N26 is the best ex­am­ple. The mo­bile bank of­fers an ac­count and a Master­card for free, which usu­ally cov­ers the needs of the av­er­age con­sumer. The cus­tomer ex­pe­ri­ence is clean and com­pletely branch­less, an ac­count can be set up in eight min­utes us­ing noth­ing more than a smart­phone and a selfie to ful­fill the KYC-re­quire­ments. A premium ver­sion of the card in­sures pay­ing cus­tomers, yet one rea­son why neo-banks can of­fer ba­sic ser­vices at a zero-pric­ing is their fo­cus on a few core prod­ucts. This leaves plenty of room for part­ner­ships. N26 does not of­fer its own loan prod­uct, for ex­am­ple, but part­ners with the fin­tech aux­money. As it moves to ex­pand its prod­uct port­fo­lio, part­ner­ing with in­cum­bent banks is also likely.

Co­op­er­at­ing with com­peti­tors is not some­thing that has been in­tro­duced with the ad­vent of digital bank­ing. Un­der the la­bel “co-ope­ti­tion”, banks and fi­nan­cial tech­nol­ogy com­pa­nies have been part­ner­ing for decades.

The longer value chains have got­ten, the more spe­cial­i­sa­tion has oc­curred, al­low­ing fi­nan­cial com­pa­nies to build un­matched scale and hard-coded

col­lab­o­ra­tion into the bank­ing sec­tor’s char­ac­ter.

Aside from sell­ing prod­ucts to each other or us­ing joint sales chan­nels, co­op­er­a­tion largely hap­pens through in­vest­ments. Con­sider this: The world’s five largest di­rect banks are all ei­ther arms of or af­fil­i­ated with a tra­di­tional bank, and among the top 20, 15 are. It doesn’t al­ways have to be that ex­treme. Of­ten fin­techs are funded only partly by in­cum­bents.

To drive or end co-ope­ti­tion?

Look­ing at fi­nan­cial his­tory, one rule can be dis­cerned – with each tech­no­log­i­cal ad­vance­ment, bank­ing sys­tems get more com­plex, need a higher level of spe­cial­i­sa­tion and ex­per­tise, and even­tu­ally end up mak­ing the value chain longer. To­day bank­ing is at the verge of no less than three trans­for­ma­tional tech­nolo­gies: cloud com­put­ing, ar­ti­fi­cial in­tel­li­gence, and blockchain. No com­pany can be ex­pected to be lead­ing in all of them, so tech­no­log­i­cal ad­vances en­force col­lab­o­ra­tion. Yet, blockchain stands out among the three. It can cir­cum­vent the en­tire pay­ments sys­tem that was built layer-by-layer over the last decade. I can send value without banks, pro­ces­sors, or credit card com­pa­nies be­ing in­volved. So, from a tech­ni­cal vantage point, it holds the key to end­ing co-ope­ti­tion, but the work­ings of the mar­ket are more com­plex than that, espe­cially when they rely on net­work ef­fects, as is the case with pay­ments.

From aca­demic re­search we know that ev­ery in­no­va­tion passes three phases – fluid, tran­si­tional, and spe­cific. Each of th­ese phases re­quires a com­pany to have dif­fer­ent strengths to be suc­cess­ful. In the fluid phase ev­ery­body is look­ing for the right use case and the killer ap­pli­ca­tion. Agile com­pa­nies that are quick and ef­fec­tive in prod­uct de­sign are the cham­pi­ons at this stage. It is all about do­ing the right thing. In the tran­si­tional phase com­pa­nies then also need to look at

do­ing things right. Prod­uct fea­tures and cost struc­tures are fine-tuned, be­fore they are in­dus­tri­alised and scaled in the ul­ti­mate spe­cific phase.

This model of in­no­va­tion dy­nam­ics ini­tially favours small and flex­i­ble fin­techs, be­fore the strengths of big banks be­come the ma­jor ar­biter of suc­cess. You need both. It is cru­cial to be the first to have in place the right prod­uct for the right cus­tomers. But it is equally im­por­tant to have the nec­es­sary fund­ing, op­er­a­tional re­sources to ab­sorb sky­rock­et­ing de­mand, and a strong brand recog­ni­tion and cus­tomer base.

Don’t for­get that tech­nolo­gies such as blockchain heave bank­ing into the digital age. Thus, all mech­a­nisms of the digital era ap­ply, in­clud­ing the win­ner­takes-all prin­ci­ple. While tech­nol­ogy en­ables fin­techs to by­pass the cur­rent sys­tem, from a busi­ness per­spec­tive co­op­er­a­tion be­tween in­cum­bents and chal­lengers has never been as needed as it is to­day. You can be sure that de­spite blockchain’s ground-break­ing setup, we will still see enough of it.

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