Big Banks In Alliance With Fintechs To Stonewall Rise Of Tech Giants In Finance

Many big banks are striking partnership deals or buying a stake in fintech start-ups.

The Sibos financial services conference held in London recently revealed these trends and bared the reasons behind the tactical partnerships.

One major reason behind the paradigm shift is the agenda of banks to stonewall the rising foray of technology giants like Facebook, Apple, Google into the financial services.

Fintech's definition says it is a business that provides financial services making use of software and modern technology.

At the London event, the key message from bank executives was that alliances with small players will increase as their compulsions are up at the competition and survival front.

One is saving costs. An alliance is the most cost-effective alternative to building costly internal technology projects. Living under tight regulation, banks see teaming up with tech companies as a way of experimenting with new products, without the heavy cost of in-house development and facing the risk of something going wrong.

Banks’ logic of alliance with fintech companies

The approach of banks to opt for tie-ups with FinTech companies also reverses old thinking that fintech will spell doom for traditional banking and they must be treated as rivals.

According to PwC, the new outlook by bankers towards fintech is a ‘sandbox approach’ where rivalry gives way to an attitude of treating them as safeguards during a potential crisis.

The analogy is appropriate as Sandbox is a computer security term that refers to programs that will mitigate system failures or vulnerabilities. A sandbox provides a controlled set of resources such as guest programs to salvage a system under threat.

Banks are recognizing fintechs’ ability to simplify complex processes and power to hike user experience.

Open Banking Standard in the UK is the fruit of such collaboration and it is making waves in many countries and markets.

Macgregor Duncan, chief development officer at Westpac Bank in Australia explains: “We partner with a lot of fintechs, and in some ways, we do so to learn.” Duncan told CNBC that “it also builds a new capability for the bank.”

Last year the Australian bank partnered with Assembly Payments for launching a payment platform for business clients. The bank also allowed its venture fund, Reinventure to invest in the six-year-old Assembly Payments that competing with Square, Stripe, and Adyen.

Duncan points out how that alliance simplified matters. Building up that payment solution in-house would have been time-consuming and costly besides violating the zero-risk policy.

Tech giants taking away banks' market share

Beyond the official positions of speed and cost savings, deep down banks are rattled by the inroads tech giants are making in the financial services.

Deutsche Bank CEO Christian Sewing listed out the specifics with names of brands that are escalating the threat.

According to the Deutsche Bank chief, Google, Amazon, Facebook, and Alipay are “already taking away market share” from the banks.

In China, mobile wallets like Alipay and Tencent’s WeChat Pay have made significant traction.

Referring to the deep pockets of tech giants, Ed Maslaveckas, CEO of fintech firm Bud said: “They can afford to lose a hell of a lot of money to engage a customer.”

Apple has already launched a credit card in partnership with Goldman Sachs. Facebook announced an ambitious and controversial digital currency called libra saying it would enable rapid transfer of money abroad.

Maslaveckas’ company Bud has joined the “open banking” wave, where third-party companies can access bank customers’ account data and make payments with advance consent.

Bud’s chief also counts Apple as a “big threat” towards banks because of its huge reach and cash pile.

Swift that runs an international payments network is also facing the challenge of new technologies like blockchain. Swift was scouting for tie-ups with fintech firms to bring in fresh innovations.

It came under pressure from Ripple, the U.S. blockchain company which wants to lead in cross-border payments. Swift now found a partner in Ripple’s rival R3 for blockchain.