The global shift towards instant, invisible and cashless payments, loans and cryptocurrency has seen the rapid rise of financial technology (fintech) firms, who are improving the performance, use, and delivery of technology solutions to financial service companies. The fintech market is estimated to grow at the CAGR of between 25% to 30% till 2025.
Fintech Firms Change the Game
With the introduction of open market regulations in the banking sector, fintech firms continue to enter the market and are particularly targeting the payments and cryptocurrency sectors. According to a report by Accenture, fintech startups are threatening to take away over $280 billion of payment revenue from banks by 2025. In response, banks have started to invest, acquire, or work with fintech companies to not only enhance their digital capabilities, but to reduce competition in the payments sector. As cryptocurrency gained traction over the last few years, banks wanted a piece of the share of the market — which has been dominated by fintech companies — and have started developing their own cryptocurrencies. For example, JPMorgan Chase created JPM Coin in February 2019, a digital stablecoin (dollar-backed cryptocurrency) that can be used for institution-to-institution payments.
Working Together Rather Than Against Each Other
Top investment banks such as Goldman Sachs, JPMorgan Chase and Citigroup, as well as retail banks such as BNP Paribas, are increasingly funding fintech companies, often collaborating with them to either utilize their products and platforms, or to form a network that can test new technologies. This gives banks early access to new products developed by fintech companies. Investment banks often offer retail banking services, and their main strategy in upcoming years will involve enhancing customer experience by providing digital consumer payments. This will only deepen their collaborations with different payments and settlement startups as well as capital market startups. HSBC have been investing continuously in blockchain and distributed ledger technology and in 2018, they also conducted the world’s first commercially viable trade finance transaction using blockchain technology. One can expect other banks will follow suit and continue to work on emerging financial technologies to enhance their offerings.
Although utilizing fintech products directly would allow banks to connect with customers without significant resource investment, acquiring a fintech firm would allow the banks to tap into new markets and customers at a much faster rate. To this end, BNP Paribas acquired the French digital bank Compete-Nickel, which would allow them to enter the French market and utilize their real-time payment transactions.
The relationship between banks and fintech companies can be quite tricky, as fintech firms have been enhancing their capabilities across varied sectors, so that their service offerings are at par with those offered by banks. Collaborating with fintech companies would require banks to upgrade and transform the IT systems that they have become accustomed to. However, it’s important that investment and commercial banks leverage emerging financial technologies to craft offerings that are relevant to today’s consumer and customizable according to their needs. One can expect more collaborations in the near future as both, the fintech and banking sectors, realize the potential the other has to offer. The banking sector is going through a massive technological transformation and would require the help of fintech companies to achieve their digital transformation goals while fintech companies can leverage existing large customer bases and diverse product portfolios.