The FinTech revolution is gathering pace. While technology has underpinned financial services since banking became digitalised, banks are becoming more reliant on agile new entrants to move their business forward to keep pace with ever growing consumer demand.
FinTechs typically specialise in niche areas, such as payments and FX, and look to offer an improved way of delivering services to their end users. Banks are recognising that by unbundling banking products and leaving FinTechs to get on with optimising key areas, they are able to capitalise on the technology they provide.
The reverse is also true, as FinTechs are, to an extent, reliant on incumbents. Without the necessary regulatory licences and direct access to banking rails and infrastructure, there are many barriers for FinTechs to overcome. While access to Faster Payments/PSD2 will go some way to help FinTechs gain independence from legacy banks, it could still be a long time before we see a truly level playing field.
Getting into bed with the banks
To combat this, established and experienced financial institutions are providing support to FinTechs in a number of different ways – through venture funds, incubators, and partnerships.
There are many good reasons for a FinTech to take this route to grow their business. Incumbents can provide an opportunity for startups to test their technology and their business model; something that a passive investor such as a VC is unlikely to be unable to offer. Established financial institutions can open doors to global markets, and can give startups advice on the financial landscape with their wealth of expertise. Crucially, incumbents can offer access to infrastructure and manage the regulatory side of things – two areas FinTechs often struggle with.
Collaboration with an incumbent may be the best option for some FinTech startups; particularly if they are looking to be acquired. However, these partnerships can present new challenges, and it is worthwhile weighing up the pros and cons before getting into bed with a partner. Some banks are jumping on the FinTech bandwagon, appearing to launch programmes for startups simply to show they are doing it, which is more for the PR benefits than having a genuine vested interest.
By providing innovative products in niche areas, which banks can then utilise and control, the FinTech may be at risk of becoming absorbed by the larger entity rather than being treated as a true partner. In addition to this, if choosing to partner with a bank, FinTechs may find themselves facing stifled innovation and restrictions on how creative and agile they can be when developing a product in a highly regulated environment.
Is going it alone an option?
Although investment in FinTech startups remains buoyant, there is no reason that startups can’t raise the capital they need to finance their business ventures on their own. But money isn’t everything. There has been a wave of funding rounds which have been overhyped, and investors are as a result, out of pocket. On the face of things, some high valuations have created FinTech ‘unicorns’ that do not appear to have a growth strategy in place and are hemorrhaging money left, right, and centre. Eventually, the cash will run out.
Often linked directly to the lack of a growth strategy are issues with scalability. More established partners can open doors to new customers and provide the support that young companies need to scale appropriately. New entrants frequently take the route of giving it all away for free to entice customers, while not making any profit. Without money coming in, although it might appear the business is growing, there is no real scope to scale.
Experience counts for a lot. Whether it is having a great legal team to make sense of new regulations, or an expert to advise on how to get a new financial product to market, FinTechs who lack the knowledge and understanding of the complex financial landscape will struggle to progress.
Aside from issues with obtaining the necessary licences to become regulated, there is the issue of accessing banking networks directly. Even Transferwise, a FinTech operating in the peer to peer money transfer space, had to backpedal on its ‘bank bashing’ messaging somewhat after partnering with Raphaels Bank to gain access to the UK’s Faster Payments Service.
Finally, not having a sandbox environment to safely test new financial products prior to launch can be a huge issue, as without one, FinTechs are unable to prove that a product is secure and robust enough to safely process transactions or personal data, FinTechs will struggle to acquire the licences required to perform the majority of financial services.
Is there another way?
There is the potential for FinTech startups to be successful without having to be reliant on incumbents or risk going it alone. More established FinTechs, who already have relationships with banks and the necessary licences to provide a testbed for new products, as well as the experience in the sector, could provide the answer.
Established FinTechs have ‘been there, done that’. These FinTechs are large enough to provide access and support which are critical for startups, but are still small enough to assist them with building their business without being distracted with too many other concerns, as an incumbent would, and can offer the additional benefit of getting growth advice inherently.This means that new entrants get the best of both worlds; support is there when they need it, without hampering the freedom they require to develop their products.
While the majority of FinTechs are not household names, startups who partner with them will benefit from the credibility that comes with being associated with an established player in the industry. Being vocal about the alliance results in increased exposure for both parties, and opens doors to new opportunities.
Of course, whichever route a startup decides to take, in order to be successful, they must ensure that they have a genuinely disruptive product that brings real value to customers. Without this, no amount of support or investment will result in success.
About the author:
Lee Britton, Commercial Director, Prepaid Financial Services
Lee joined Prepaid Financial Services in 2011 as Commercial Director to drive all sales activities, having worked within the payments sector for over 20 years previously. During this period, Lee was one of the co-founders of an issuing processing platform that was certified globally via Visa and MasterCard and launched programmes in USA, Antigua, UK and Australia. He also founded and launched Altair Financial Services Ltd., a highly successful prepaid programme manager in Europe.
During his career, Lee has raised in excess of $60m for technology companies in the payments sphere from seed capital to some of the world’s largest hedge funds. Lee has been instrumental to the growth of PFS, which is now one of the fastest growing technology companies in UK and EMEA.