What is the status of collaboration vs disruption in your jurisdiction as between fintechs and incumbent financial institutions?
Fintech (2nd edition)
Over the past couple of years, collaboration between fintech companies and incumbent financial institutions is on the rise. This collaboration is taking several forms including partnerships, increased investment by incumbents, and joint development activities. At the same time, a healthy level of competition remains which is leading to additional efficiency and resiliency in the financial system as consumers are presented with more options.
The approaches that fintech companies and established technology companies take in offering new, innovative services differ to some extent. For example, fintech companies typically do not have the scale or user base to compete with incumbent financial institutions in mature industries. Therefore, fintech offerings tend to be complementary and collaborative with financial institutional offerings. Contrarily, established technology companies usually have vast networks, brand recognition, and large user bases that enable offerings to be tailored to individual consumer preferences. Additionally, these established technology companies, in some cases, can leverage their customer data to innovate in spaces and offer new products that fintech and incumbent financial institutions simply can’t access.
Prudential financial regulators have issued TPP guidance that outlines requirements for when banks engage with fintech companies and other TPPs in order to properly assess and manage risks associated with such relationships. This guidance emphasizes proper risk management that considers planning, due diligence, contract negotiation, ongoing monitoring, and termination throughout the life of the relationship.
Incumbent financial institutions were initially rather reluctant and reserved towards fintechs, which came to disrupt this specific sector. Over the past five years, however, this reluctance has given way to a relationship of increased cooperation. Four main trends towards cooperation are noticeable: (1) there are incumbents which focus specifically on what is happening in the field of fintech and actively support particular fintechs; (2) more and more incumbents support fintech industry organisations, such as e.g. FinTech Belgium and B-Hive, where fintechs get a shared platform; (3) some promising fintechs are acquired by incumbents through M&A, which allows to benefit from the widest possible opportunities; (4) more and more often, due to the high cost of client acquisition, fintechs are called in to provide B2B services to incumbents, whereby the latter hence becomes a customer of the fintech.
Although the rapid pace of growth in regulation of the fintech industry has been extremely beneficial to fintech businesses, it has created some challenges to incumbent financial institutions. Nevertheless, incumbent financial institutions have been proactive in trying to develop policies that may be able to better accommodate or compete with fintechs entering the Bermuda corporate environment. As the fintech industry continues to develop globally, incumbent financial institutions will likely become more receptive to fintech business.
Although it is true that the insurgence of fintechs may make it look as if incumbent financial institutions, such as banks, are facing the risk of becoming obsolete (along with “declaring war” against these new technologies), truth is there is an infinity of options besides fighting or surrendering.
The financial system is going through changes and implementing new technologies in payment services, which has plenty of potential when it comes to boosting the efficiency and lowering the costs of such services.
This explains why a considerable amount of banks are making fintechs their partners and why a lot of them are interested in joining Open Banking once the integrated API’s are a reality in Brazil.
So generally it is fair to say that Brazil is migrating slowly from a disruption model into a collaborative model. However we are as just in the beginning of this trend
The relation between Fintechs and incumbent financial institutions is at an early stage. Chilean companies tend to develop their technology internally. For example, BCI Bank launched MACH, its mobile wallet to send and receive cash quickly and has its own virtual prepaid card. Nowadays, we can only see a few cases of incumbent financial institutions working together with Fintech.
There has been more competition/disruption than collaboration in China between fintech companies and incumbent financial institutions. In particular, WeChat and Alipay have taken huge market shares in the payments space, with it now being estimated that 47 percent of daily expenses go through mobile payments.
However, banks themselves have been innovating to try and regain market share in the payments space. For example, UnionPay has connected nearly all mainland banks within one mobile app to expand mobile payment services; and China’s dominant bank card clearing service has launched a nationwide campaign with aggressive discounts on transaction fees on the vendors’ side to attract users of Alipay and WeChat Pay, and has also successfully pushed Alipay and WeChat Pay to charge customers for fund transfers from Alipay or WeChat Pay to bank accounts.
However, there have also been some instances of collaboration. For example, fintech companies have established collaborative relationships with commercial banks, such as one between Ant Financial and the SPDB, whose digital transformation Ant Financial supports with its technological capabilities, and another between WeBank and the Agricultural Bank of China in the field of mobile payment smart accounts, cross-border payments, credit card business, etc.
The beginnings of fintech in the UK were largely hyped as being about disruption, and at the time this was largely true: challenger banks and international money transfer businesses dominated the headlines. However, the market has now matured into three main sections.
First are the genuine disruptors: those who take something that the incumbent banks already do, and do it faster, cheaper or in some way better – and steal market share by doing so. These include international money remittance providers and challenger banks.
Second are probably the largest group overall, the suppliers: these are the companies supplying services to other financial institutions in order to help those institutions do something that they do already, but do it better. There are obviously a great many options here, but by way of example only this could include data gathering and analytics (e.g. Eigen Technologies), onboarding / ID verification technology (e.g. Onfido, Yoti), or regtechs like Axiom HQ, Tessian and Cube Global that help institutions to maintain compliance with their regulatory obligations.
Third are arguably the most significant group in terms of the overall effect on the financial system, the niche-fillers. These are the companies that are doing something that no one else was doing before. This covers a broad range of services, from funding platforms that service loans that the incumbent banks would not normally take on (e.g. iwoca), to companies that produce digital receipts for store purchases (e.g. Flux) to companies that choose to offer traditional banking services in a way that makes them more accessible to people who normally find it difficult to get a bank account (e.g. Monese).
In relation to the first category, collaboration is naturally less likely. However, the second and to a large extent the third categories lend themselves to collaboration. An incumbent financial institution can benefit from new innovations of suppliers without having to create them itself, and can partner with niche-fillers to participate in markets that were previously closed to them. It is in this context that we have seen the most activity and change over the past few years, as incumbents become more skilled at adapting their contracting and procurement processes to the start-up world. In our experience there is still some way to go with many of the banks, but it is now far easier for a start-up to partner with a UK bank than it was even three years ago.
A significant recent step in the field of collaboration is the release by the British Standards Institute of a guide on “Supporting fintechs in engaging with financial institutions”. This document was created by five of the UK’s biggest banks and a number of leading fintechs, led by Tech Nation and the Fintech Delivery Panel (see answer to question 10 above), to act as a guide for fintechs who may be unfamiliar with the procurement processes and concerns of financial institutions on how best to approach the various issues that typically come up in a “partnering process”. It is an excellent guide that any fintech should read, it is to our knowledge the first of its kind in the world where a number of major banks have come together to try to facilitate better collaboration with fintechs.
There is an argument that similar guidance is needed for institutions to further improve their processes and strategy in order to partner with fintechs effectively, as unnecessarily burdensome documentation, policies and sign-off processes often stand in the way effective partnering – efforts are being made by some institutions in this direction but there are significant further improvements that could be made. The institutions that get the partnering process right stand to gain significant competitive advantage over their peers in the acquisition of new functionality for their customers.
Up until December 2018, financial institutions relationship with fintechs was limited to software vending services and, even though, incumbents were members of the main fintech association in the country, a high level of suspicion existed. In December 2018, banks were allowed to invest in fintech startups which drastically changed the relationship, allowing startups to become acquisition or investment targets and helping to develop more collaborative relationships due to alignment of interests.
As illustrated above, there is a predominant trend of incumbent financial institutions investing significantly in fintech start-ups, resulting in a collaboration between fintech entities and incumbent financial institutions in the UAE. This can be attributed to two main reasons, inter alia:
- The ownership requirements on UAE Onshore requiring that PSPs be majority-owned by, inter alia, UAE licensed financial institutions; and
- An apprehension by incumbent financial institutions of competition from certain fintech entities having business models able to bypass the high barriers to entry traditional financial institutions must satisfy.
It should be noted that the adoption of fintech by incumbent financial institutions may result in the redundancy of many banking jobs.
With respect to the provisions of payment services, the 2017 Payment Regulations require that, in the majority of cases, PSPs are majority-owned by, inter alia, UAE-licensed financial institutions. Due to the current difficulty in obtaining licenses to establish such financial institutions, many fintech entrepreneurs wishing to access the payment sector must either partner with incumbent financial institutions or establish themselves as Technical Service Providers.
Financial Free Zones
The nature of regulations in the Financial Free Zones, in particular, the more flexible ownership and data storage requirements relative to UAE Onshore, result in a larger potential for disruption between fintechs and incumbent financial institutions.
The fintech development model in Taiwan should be deemed as “collaborative” rather than “disruptive”. The incumbent financial institutions are collaborating with fintech companies to enhance their services. According to a local survey, more than 60% of the incumbent financial institutions are willing to collaborate with fintechs to offer new types of services or to improve their current service skills. Some of the incumbents purchased services or products from fintechs and a few of them made investments in fintechs or even established their own fintech companies. Incumbents, such as banks, are working with universities and incubators for talent mining as well. Many competitions were held to encourage colleague/graduate school students to develop innovative business models and technologies. There has not been any disruptive “force” or “development” in the area of fintech in Taiwan.
While at the beginning, many expected fintech start-ups to disrupt the market and to threaten established players, today start-ups tend rather to co-operate with existing financial institutions. This trend is expected to continue, as the existing financial institutions have the customer relationships which many of the start-up products need. Many financial institutions have already bought start-ups or have their own research development departments.
In the past, we have mainly seen Fintech solutions being developed by incumbent financial institutions (e.g. MobilePay developed by Danske Bank). However, as previously mentioned, we see an increasing trend towards collaborations between financial institutions and fintechs, leveraging a more agile approach to development. This includes, for example, the Copenhagen Fintech Accelerator project, led by two incumbent financial institutions, Nykredit and Danske Bank, in which 8 fintechs have been selected to co-operate with the financial institutions to develop new solutions within the financial sector. We expect to see an increasing focus on such collaboration exercises moving forward.
When the fintech market began to grow, so did the concern on whether Fintechs would replace the incumbent financial institutions. Fintechs were sometimes viewed as a threat as they were providing some of the same services at a smaller cost and with faster and better technology.
Recently the landscape has shifted, with incumbent financial institutions realising that fintech players can and should be partners and collaborators.
Associating the pre-established infrastructure, manpower, financial resources, brand and clientele existing in incumbent financial institutions with the innovation and outside-the-box thinking usually associated with fintech companies allowed incumbent financial institutions to incorporate the potential disruption into their ecosystem.
On the other hand, it allowed fintech players with (still) limited resources and little brand recognition to implement their business ideas under a structured and mature environment.
On its July 2018 report the European Banking Authority (“EBA”) expressed exactly this, highlighting the immense potential for collaboration and the positive impact it could have on consumers. (“Report on the impact of fintech in incumbent credit institutions business models”).
We believe that collaboration would be the way forward either for Fintechs, Banks and Bigtechs (even for regulators).
The answer to this question depends very much on the area of activity in question. In areas with high market entry barriers, such as in particular traditional banking and payment business, the focus is on cooperation models and outsourcing (with the exception of individual fintech banks with high disruptive potential). Disruption has so far taken place primarily in areas where the implementation of business models is less dependent on obtaining complex and expensive regulatory permits, such as crowdfunding/crowdlending and – arguably – DLT.
Incumbent financial institutions have been quite supportive of fintechs, through various means and have collaborated/invested in fintechs in an effort to maintain their position in a changing financial world. As a result, the main effect has been more on the collaborative side than disruption.
We are not aware of any current collaboration between incumbent financial institutions in Portugal and other fintech companies. The most common approach to fintech by Portuguese banks seems to be carried out either by internal development and R&D or by integrating outsourced services or solutions to tech firms.
Banks and non-bank FinTech players had initially launched competing products and the FinTech landscape in India was, for a while, segmented into bank vs. non-bank players. In fact, the major advantage for a non-bank FinTech player such as a non-bank PPI issuer was ease of customer onboarding process and ease of access to diversified goods and services, without the need to primarily rely on bank accounts, for such purposes. However, the market has now shifted to a more collaborative model, with banks and non-bank entities partnering on several dimensions, each leveraging their respective strengths, to provide customers easy to use financial products. Non-banks have the ability to leverage technology more effectively, and are able to access customers and markets that banks would find too expensive to tap in the ordinary course. Banks have strong balance sheets and a robust understanding of the regulatory and licensing regime governing financial products, particularly KYC regulations.
In the payments landscape, banks regularly partner with third party technology service providers to manage the customer and product interface for both PPI and UPI based payment products. In the digital lending space with the notification of the Account Aggregator Master Directions, it is expected that banks will increasingly rely on innovative credit scoring and appraisal procedures developed by technology partners, for processing applications at the loan origination stage and for offering tailor made financial products to their customers.
During the last 2-3 years, FinTech companies and financial institutions have begun to form alliances with the primary objective of facilitating the provision of financial services and improving the user experience (UX). Most of these collaboration agreements involve FinTech companies providing “leeds” to financial institutions, being the latest the ones responsible for the service rendered to the customer. There are no relevant co-branding agreements, nor any disruptive initiative between FinTech and financial institutions in Peru.
Traditional banking corporations are very interested in Fintech and the technological innovation in the field, but due to regulatory requirements they are limited. On the other hand, some of them make it difficult to integrate with the banking system because of problems related to anti money laundering. However, some of the Fintech companies allege that there might be commercial considerations which banks take into account, when inspecting the activities of fintech companies and sometimes denying the provision of banking services to them.
Although fintech companies are not disrupting the stability of the Dutch financial system, the fintech industry is expanding and growing exponentially – both globally and in the Netherlands. Fintech companies are increasingly gaining territory in the broader financial services landscape. PSD2 is helping to promote broader acceptance of Fintech developments, while incumbents are also embracing the potential of fintech solutions.
Dutch incumbents are investing in fintech companies and exploring other ways of collaborating with them (eg, Aegon’s fintech investments – in particular, in alternative financing platforms – via its venture fund Transamerica Ventures; ABN AMRO’s collaboration with Fintech Temenos and investment through its Digital Impact Fund; and ING Ventures, a fund focused on fintech investments, such as in Dutch Fintech company Cobase, which recently obtained its PSD2 licence from the Dutch Central Bank, enabling it to launch its multibank platform).
Financial institutions, such as banks or securities corporations, have a strong interest in blockchain technology and are generally favourable to investing in Virtual Currency Exchange Service Providers. For instance, it is reported that one of the major internet securities corporations in Japan, acquired 100% of the shares of one of the largest cryptocurrency exchanges in Japan on April 2018, and another major internet securities corporation, also invested in a deemed Virtual Currency Exchange Service Provider on August 2018.
The fintech projects we are currently seeing are not specifically designed to provide open banking solutions. In terms of payment services, the fintechs we advise are existing businesses expanding their offering into Jersey rather than providing banking services designed to directly compete with incumbent financial institutions. This is an area likely to develop in the coming years and the equilibrium of collaboration vs disruption will be subject to change.
At this point in time it is more collaboration between financial institutions and fintechs in Liechtenstein (incubators, sponsoring of lecture series and summits on the topic, support of projects for fintech start ups).
Also some financial institutes try to become leaders/pioneers in the developing Liechtenstein fintech market, while established global fintech companies aiming to gain influence in existing financial institutes in Liechtenstein.
In 2019 a financial institute acquired majority stakes in two Liechtenstein based fintech companies and established two fintech related subsidiaries, one for the promotion and financing of fintech and blockchain start-ups and one that offers institutional investors professional access to multi-exchange trading of digital tokens.
While open banking is encouraged, the secondary regulations have yet to remove the incentives against collaboration between FTIs and financial institutions (see Q4 above); it can be said that developments brought about by these phenomena are yet to be assessed or pondered.
In Luxembourg there is a strong degree of cooperation between fintechs and incumbent financial institutions. Please see for details Q. 21.
Fintech is high on the policy agenda in Malta, therefore financial institutions are encouraged to collaborate with fintechs to ensure that the industry enjoys a positive environment within which it can continue to grow. Reacting to a number of cryptocurrency exchanges and other fintech service providers setting up shop in Malta, some of the well-established players in the local financial services industry have understood the need to keep their status as prime movers in the financial sphere and are thus asserting their vantage point within the industry by exploring innovative technological solutions to their business models. Despite sporadic instances of non-collaboration by some Maltese banks refusing to allow money transfers to and from crypto-exchanges, we are seeing an increase in disrupting fintech companies, mostly infiltrating sectors such as payments, insurance and risk management through robo-advisory.
The banking industry is undergoing significant change as customers demand digital services. To meet these evolving needs, banks are realizing the value of partnering with fintech firms to spark innovation. Previously, based on the study conducted by PricewaterhouseCoopers Malaysia in 2016, about 82% of the financial institutions worry about losing to fintechs. The financial institutions are very concerned about the regulatory uncertainty and information technology security. Fast forward to now in the year 2019, Malaysia’s fintech industry has expanded further, particularly in banking, innovation and high-technology areas. Financial institutions seem ready to embrace the disruption caused by fintech, as seen with the various programmes launched by these enterprises to help fintech startups develop.
Based on an article published, it was said that Domenic Fuda, CEO and Group Managing Director, Hong Leong Bank Berhad feels that the fintech landscape has really been flourishing this past three years with both homegrown and regional players entering the market. He believes that the fintech ecosystem has much room to grow in Malaysia especially in areas like lending and KYC, while payments are wallet, he opines are more crowded than others. He believes that fintech companies need to work together with incumbents, such as banks in order to be successful. A collaborative approach as opposed to a disruptive one would be well suited for a highly regulated sector like finance. He added that, partnering with fintechs offer opportunities for the incumbent in many areas such as delivering cost reduction opportunities, differentiated offerings, and customer retention, to prospects for additional revenues.
Furthermore, Jambugesvarar Marimuthu, Head of Digital Strategy and Innovation for RHB Bank Berhad (“RHB") as saying in an article published, feels that fintech in Malaysia has gone past its infancy and is approaching the point of maturity with the private and government sector becoming increasingly welcoming towards fintech. He believes that Malaysia has yet to achieve status of a fintech hub and for that reason he is being cautious not to be over positive about fintech. He believes that the industry would require more regulatory change, consumer education and most importantly stronger collaboration between banks and fintech companies to allow more innovation to happen in the industry.
Recognizing the need for a cooperative relationship between banks and fintech companies, RHB has embarked on several initiatives. In 2015 was when RHB really started their journey, where their main focus was primarily to understand the needs of fintech and identify possible synergies to work together. RHB is already working with two of the leading fintech companies in Malaysia namely MoneyMatch and Funding Societies. It was made to understand that RHB will also continuously work closely with the fintech community to discover more opportunities to collaborate while also contributing to growth of fintech in the market alongside with regulators like BNM and SC in the near future.
Moreover, as seen in an article Malayan Banking Berhad (“Maybank”) Maybank sees Maybank Fintech as a tremendous opportunity for themselves to harness the startups ecosystem regionally, to acquire the best innovation ideas in financial technology. Maybank has launched the Maybank Sandbox, the finance giant provides entrepreneurs and startups with the facility to get their fintech ideas out to be developed. The emergence of technology in the financial sector has opened up new opportunities that allow banks like Maybank to reach a bigger market, offer an enhanced customer experience, and improve the efficiency of systems and operations.
In Singapore, incumbent financial institutions state that they generally embrace disruption of the finance industry, and place much emphasis on the innovation and development of FinTech solutions. To this end there is much collaboration between FinTech companies and the incumbent financial institutions.
For example, as mentioned above at question 4, banks have been proactive in supporting open banking. DBS, OCBC, Citibank and Standard Chartered Bank, which are either local banks or banks with a local presence, have allowed third party FinTech developers to access customer data through API, in order to allow these third party FinTech developers to offer value-added services to its customers.
Despite the impression that Fintech may cause disruption in the existing financial market and conflict of interest between Fintech companies and incumbent financial institutions, that is not entirely true in Korea; many incumbent financial institutions are making various attempts to introduce Fintech to their business areas and are collaborating with Fintech companies. Especially, as mentioned earlier, the Korean government is promoting “designated agent” system under the Special Law to Support Financial Innovation which allows Fintech companies to be assigned the work of incumbent financial institutions. Through such arrangement, incumbent financial institutions with existing client base may be able to enhance their work efficiency while the Fintech companies may test their technology in the market and, if proven feasible, use it to expand the scope of their business even after the completion of such arrangement.