What is the status of collaboration vs disruption in your jurisdiction as between fintechs and incumbent financial institutions?
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.
Due to the size of the domestic market and the restrictions on doing business within the Cayman Islands, there has not yet been significant disruption of incumbent financial institutions.
While fintech may be one of the greatest disruptors for incumbent financial institutions in Cyprus, fintech has not yet penetrated the domestic financial services market to the extent of disruption at a notable level. In our view Cypriot financial institutions are currently in the process of working out a way to utilise fintech to their advantage through collaboration.
The fintech environment in Denmark is dominated by a collaborative spirit and lot has been done to establish Copenhagen as the Nordic fintech hub. Many successful Danish fintechs are currently collaborating with existing fi-nancial institutions (most often banks) in order to gain access to potential customers, data or capital. Most notably are the establishment of the Co-penhagen FinTech Lab by industry interest groups and commercial sponsors. Copenhagen FinTech Lab has been a strong driver for collaboration between the fintechs and the existing financial industry in Denmark.
As a main rule, fintechs and incumbent financial institutions are collaborative and have fairly good relationships with each other. Many Finnish banks have openly stated that they find the best approach being collaboration rather than raw competition.
Many larger incumbent financial institutions have their own partnership programs and innovation platforms, but there are also some good examples of a more concrete cooperation.
As an example from recent months, in May 2018, Nordea and a Finnish fundraising platform Invesdor announced that they will initiate collaboration in digital financing, which aims to improve the availability of alternative financing solutions for Finnish growth companies.
The relationship between traditional finance and FinTechs seems to be moving from confrontation to co-operation. The competitiveness clustering “France Innovation,” in a 2016 white paper, emphasised on the complementarity between banks and FinTechs and on the necessary co-evolution of those two industries. On one hand, banks are experiencing a strong dematerialisation trend (only 17% of their clients visit their local bank more than once a month, as opposed to 62% five years ago) and thus have a strong incentive to support technological innovation by FinTechs in order to reinvent their business model and customer service. On the other hand, banks enjoy large market shares and a solid expertise that can be useful for FinTechs looking to develop their activities and to benefit from economies of scale. FinTechs, therefore, seem bound to complement and inspire traditional finance rather than replace it. A few examples of this co-evolution trend can be observed in the French FinTechs market such as:
- Consortium Euronext, ie BNP Securities Services, Euroclear, Euronext, Société Générale and other institutions, have joined forces to develop blockchain-based post-market infrastructures for ETIs;
- In 2017, BNP Paribas acquired Nickel, a start-up developing an online bank account that can be opened in five minutes;
- In June 2017, the French bank La Banque Postale acquired the crowdfunding platform KissKissBankBank;
- Since 2014, the French bank Crédit Agricole has welcomed around 90 start-ups, including 15 FinTechs, in Paris to help them develop and to find clients and partners;
- BNP Paribas has developed the WAI (We Are Innovation) centre in Paris, which works as a business incubator for FinTechs;
- In 2012, BPCE created its own internal start-up, S-money, for payments-related innovations. It then started acquiring FinTechs;
Other incubator initiatives include the Finance Innovation cluster, which helps to facilitate innovating projects and research projects related to FinTechs. More than 380 projects presented by start-ups, SMEs and large undertakings have already received the “excellence label” delivered by Finance Innovation. Finance Innovation supports and advises more than 1,000 businesses. This cluster also aims at facilitating discussions and exchanges between stakeholders in the Fintech industry.
However most Fintechs are not looking to partner with traditional finance institutions but to bypass them in order to gain market share by offering consumers innovative services and new methods of consumption. According to a 2016 Business Insider survey, 43% of French banks see French Fintechs as a possible threat, while 24% see them as collaborators and 15% see them as possible technology acquisitions.
Whether a FinTech aims for a more collaborative or a more disruptive approach depends on its business strategy. It turns out, that not the most disruptive, but the most cost-effective strategy is oftentimes the way to go. In this regard the busi-ness model of FinTechs depends on collaboration with established financial insti-tutions, when the regulatory framework forces them to avoid the oftentimes strenuous license and application process and to rather cooperate with a fronting bank, in order to save money and profit of the bank’s knowhow.
There is a high degree of collaboration between fintech businesses and financial institutions, especially since said businesses still rely on the traditional banking system and services (for example loans) in order to establish their businesses and operate on an ongoing basis. Financial institutions in Gibraltar are becoming increasingly comfortable as the fintech industry begins to mature.
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.
On the one hand, the large banks in Israel have development, digital and high-tech divisions that both invest in existing high-tech and fintech companies (and even acquire them) and develop their own independent products and services in this field. As a consequence of the efforts of the Supervisor of Banks at the BOI to digitize the process of onboarding and providing banking services through digital means, various banking entities (as well as debit card companies) have, in recent years, been working to develop digital services. On the declarative level, Israeli banks have declared their interest in joint ventures with both Israeli and foreign fintech companies, and that they regularly consider such engagements. See also answer to question 21.
On the other hand, according to several reports, the large banks have made it difficult for several fintech companies (such as companies engaged in P2P loans or cryptocurrencies) to obtain banking services, such as opening accounts. In the course of adopting the Supervision Law Amendment and adding the chapter regulating the operations of P2P lenders, the Supervisor of Banks and the Supervisor of Financial Services were required to sign an MOU setting out terms that would allow for bank accounts to be opened for these entities.
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.
Mexican traditional financial institutions have actively cooperated with Fintech institutions by including digital transformation tools in their business, with the aim of being at the forefront. However, the picture is still extremely conservative.
British Virgin Islands
Notwithstanding the devastation caused by the 2017 Hurricanes to the territory, the BVI Financial Services Commission’s commercial registry, which is a digital registry, remained completely and continuously active during the catastrophic storms and in the aftermath. Service providers were able to access the electronic on line system without any delay or disruption due to business continuity mechanisms having been in place which utilises geographic redundancy and alternative global access points.
Presently, financial institutions in the territory are eagerly seeking to capitalise on fintech innovation, coming together in a variety of public/private sector committees to determine and forge a way forward. The Financial Services Commission (the Regulator) is welcoming the technological advancement and is seeking to guarantee that it regulates at the appropriate level required to ensure that the industry can flourish accordingly.
SSEK: Financial institutions, especially conventional banks, have been disrupted by the rapid growth of fintech in Indonesia. This is particularly the case for payment and alternative lending services, as fintech providers are able to offer more flexible lending terms than banks, which in Indonesia are much more heavily regulated. However, there has been a notable uptick in collaboration between banks and fintech providers, particulalry in the use of analytics (e.g., customer experience and mining of social media data).
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.
There is a healthy "coopetition" between fintechs and traditional financial institutions. Some financial institutions have developed products and services aimed at competing directly with non-bank fintechs. JP Morgan has a large internal development group that has developed COIN, a machine learning contract intelligence tool, as well as the Quorum blockchain. Non-bank fintechs, such as Stripe's payment platform and Kabbage's on-line lending platform, compete directly with financial institutions.
Other financial institutions have chosen to partner with non-bank fintechs, such as Citizen's Bank partnering with fintechs to provide robo-advisory services to its customers, and US Bank partnering with Plug and Play in its cybersecurity program. Both Citibank and Goldman Sachs have longstanding accelerator programs for fintech startups.
Whether there is collaboration or disruption between fintechs and incumbent financial institutions in the UAE depends on the activity undertaken by the fintech and in which jurisdiction.
With respect to the provisions of payment services, the 2017 Regulations require that, in the majority of cases, payment services providers are majority-owned by, among others, UAE-licensed financial institutions. Due to the difficulty in obtaining licenses to establish such financial institutions, many fintech entrepreneurs wishing to access the payment sector 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 mainland of the UAE, result in a larger potential for disruption between fintechs and incumbent financial institutions.
There is a predominant trend of incumbent financial institutions investing largely in fintech start-ups, resulting in a hedge against or containment of a significant part of detrimental disruption from fintech start-ups. However, adoption of fintech results in a high likelihood of many redundant banking jobs and certain fintech entities have created business models able to bypass the high barriers to entry traditional financial institutions must satisfy.
The National Bank of Ukraine and the Ministry of Justice of Ukraine are the most loyal towards the implementation of the finfech solutions. The remaining governmental authorities that regulate the financial sector are more cautious with respect to groundbreaking technology, however, they are actively studying the possibility of its implementation either.
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.
Incumbent financial institutions are embracing the disruptive changes introduced by fintech and entering into partnerships to expand the range of services offered to their customers and respond to customer demands. Significant collaborations have been witnessed between fintech enterprises and incumbent financial institutions across the digital payments landscape across India. PhonePe, a Flipkart Group company, and Yes Bank have partnered to launch a UPI based mobile payments app. A leading private bank in India, Axis Bank also recently acquired a digital payments company, FreeCharge to boost its exposure in the sector. Even, Google has collaborated with HDFC Bank, ICICI Bank and others to offer the Google Pay app and more recently, instant, pre-approved loans to customers to its users.
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 and Tessian 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.
At the beginning of the fintech wave a few years ago, fintechs were often seen as disruptive and competitors that would jeopardize the traditional banks’ market share. Instead of becoming adversaries, however, we have seen an increased collaboration between fintechs and incumbents. Most fintechs need the incumbents for scaling up and market access whereas the incumbents require fintechs’ cutting edge technology to accelerate the pace of innovation within their own organization and to improve their products and services and introduce new ones.
Especially the major Dutch banks (ABN AMRO, ING an Rabobank) have established significant fintech funds for partnering with and investing in fintechs. The funds are generally available for seed stage investments to scaling stage investments.
On one hand, fintech companies can equip traditional financial institutions with innovative ideas, digital service, entrepreneurial talent management, big data services. For instance, Wechat Pay work with traditional banks to allow users to link their credit cards to their online wallets. Traditional financial institutions can also provide fintech companies with big data, comprehensive product designs, professional risk management expertise, and the convenience of thousands of physical branches. The innovation of incumbents is driven by the fintech companies in multiple ways, and the fintech companies also benefited from the experiences the incumbent financial institutions accumulated.
On the other hand, with the fintech companies entering into the financial fields, incumbents are facing the difficulty to overcome the disruption caused by new fintech counterparts and how to synchronize and adapt to the new changes that facilitate customers’ satisfaction. For instance, the Yu’e Bao fund integrated into Alipay became the world’s largest money market fund within 4 years. Assets under management have moderated to around RMB 1.45 trillion (approximately 213 billion US dollars) as Yu’e Bao (余额宝) launched other money market funds to address concerns from regulators on the size of a single fund. With the rising of Yu’e Bao, the incumbents are facing difficulties to change the traditional channel to sell the fund products to Internet and also apply AI tools to boost the efficiency.
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.
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.