Banks’ indifference to fintech startups is well and truly over. Most are now busy partnering with, investing in and buying these would-be disruptors. It’s a shift in attitude that’s a long time coming. As for startups many are now taking a more mature perspective. UK currency conversion unicorn TransferWise is a case in point. It’s made a name for itself with high-profile, confrontational ads attacking banks. Yet even here there are limits with the startup now working to integrate its service into that of the very banks it often attacks.
There are many routes for partnerships in banking particularly among lending. For banks the trend is obvious. Lending is moving online and many do not have the technology to serve this market. Online lending is quicker and cheaper to operate as once it’s set up the cost of running it is very low. There are several successful examples of this happening already such as with OnDeck and Funding Circle. Both make their money by lending to small businesses and both are partnering with large banks. In the case of US-based OnDeck is working with JP Morgan, while the UK’s Funding Circle is working with Santander and RBS.
“In Santander we have found a fellow challenger brand that shares our commitment to putting small business customers’ needs first,” says Funding Circle CEO Samir Desai. “They have created a blueprint for other banks to follow.”
For challenger banks such partnerships are essential. This new breed of digital-only banks have a limited range of services and lack the money to buy successful fintech startups. Number26, for instance, is partnering with TransferWise to let it offer currency conversions in its app, at a much lower cost than traditional banks typically offer. Such partnerships are going to become more common. Challenger banks need add more services quickly and partnerships are the best way for them to do this.
Buying is the easy, but more-expensive option and indeed few fintech startups are out of the reach of deep-pocketed banks. JPMorgan could easily afford to buy OnDeck if it wanted to. The challenger banks would also pose no challenge to the bottom line of most banks and Spain’s BBVA already snapped up Simple, as well as Finland’s Holvi, which supplies banking services to small and medium-sized entrepreneurs.
Investing in startups is also very common for banks all over the world. Canada’s Scotiabank, for instance, holds a stake in US online lender Kabbage, while BBVA owns a stake in UK challenger bank Atom. Expect many more acquisitions of promising fintech startups, especially in lending as banks are the only place these startups can get the capital they need.
“As important as the money is, much more important is the ability to exchange ideas and progress,” says Atom Bank CIO Edward Twiddy speaking about the investment from BBVA. “The transfer of ideas and people since they came on board has just been so valuable.”
These deals just scratch the surface and on many occasions banks are investing together on the same deal. Goldman Sachs and JPMorgan are both investors in Motif Investing for instance. Payments company Square counts Goldman Sachs, Citigroup, Morgan Stanley and JPMorgan among its backers. Bitcoin is of particular interest to banks as it’s got the potential to dramatically upend finance. It’s also a relatively new technology forcing banks to turn to startups to bring on board the talent that understands the technology.
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