Banks facing disruption from fintechs are taking the strategic decision to keep these digital enemies close, even so close as to acquire them, rather than risk losing out.
Fintechs, digital banks and fresh—as yet unknown— competition due to open banking regulations are shaking the foundations of traditional banking.
Emerging technologies pose a threat to banks that are unable to compete, according to an official report from the US Office of the Comptroller of the Currency (OCC). "Failure to innovate to meet evolving needs or financial services may place a bank at a competitive disadvantage," said the OCC.
Rather than rushing to build fintech-type systems, banks are instead going to buy the very fintechs that are disrupting their business. It has already begun; Goldman Sachs' Investment Management Division last year said it will acquire a digital retirement savings platform called Honest Dollar.
Collaboration between these competitors is very attractive given their mutually compatible profiles.
“Fintech start-ups lack the scale, capitalization, reputation of security, ability to navigate complex regulations and the product scope of traditional financial firms,” the Financial Brand’s Jim Marous told Accenture Consulting.
“Alternatively, traditional banking organizations are hindered by legacy operating systems, capacity to innovate, agility and technology expertise,” he added.
Banks of all sizes have tremendous opportunities to accelerate digitalization by bringing enemies closer. Two challenges will face the banks once that decision has been taken: First, how to securely integrate the new capability so that it can be monetized as quickly as possible. The second challenge is less clear cut: Corporate culture. Yes, the cultures are can be significantly different, but not as drastically as some might believe for one obvious reason; many of the fintechs have been started by former bankers.
So, just like the Big Bang in the U.K. back in the late 1980’s, or the gradual repeal of Glass-Steagall in the U.S. that began in 1983, when the banks became able to buy brokerages, there can be some awkward courtships. And eventually, just as happened with the banks and the brokers, the culture of the acquired fintechs—their agility and entrepreneurialism—will enable fintech leadership to take over the banks, just like brokers did previously.
Fintechs and banks together are a powerful combination, and marriages will happen. They will be enemies no more.