„Curse or blessing – from the (mis)understanding between banks and FinTechs“

Curse or blessing – from the (mis)understanding between banks and FinTechs

POSTED ON 05. FEBRUARY 2019 BY HENRIK BÜTTGEN

Banks and FinTechs are now in reality? 

Banks and FinTechs, not so long ago still like fire and water, have apparently arrived in reality in the meantime. The FinTechs are increasingly looking for supporters for their own ideas and find these more and more in the banking environment, because here too a fundamental rethinking has taken place. And each of the two formerly opposing groups seems to have found its position in the game of customer favor and is focusing on its strengths.

How did this development come about?

The media, with their sometimes sharp coverage, certainly also made a not insignificant contribution to this development. They liked to pick up the ball from the two conflicting camps and exploited it. The song of the death of the banks was started, because the young wild ones now take over all the tasks of the banks and that better than they could ever do. The fact that some FinTechs had already understood at that time how it could work in cooperation with the banks was not mentioned.

But what does it really look like?

Currently, a message about mega financing rounds for FinTech start-ups is chasing the next and new ideas for services in the financial sector are not ebbing away. In 2018 alone, about 2 FinTechs were founded per week on average. Although this does not mean an exponential increase in the number of start-ups compared with previous years, the figure is still interesting.

If we now look at the area of payments/payment transactions, which is of particular interest to us, then we remain in the single-digit range with the new companies and only around 2 percent were able to collect capital for their ideas.

Why is that?

What have the FinTechs still on the market done differently from those who had to strike their sails after using up their capital because they had failed at reality? Because these news also occurs at the same frequency as the news about start-ups with large funding capital.

Successful FinTechs, be they defined as established companies running on their own with a healthy number of employees who are not worried and fear from financing round to financing round, have all realised that cooperation with banks seems to be the right way forward. Examples include N26, Kontist, Deposit Solutions, Raisin (formerly Weltsparen) and similar FinTechs.

With the exception of N26, which already has a banking licence, all of them have an established banking institution on their back for operating successful business models.

Especially if the business model of FinTechs envisages the takeover/improvement/simplification of individual parts of the banking business, cooperation is the ideal solution. The attempt to expel banks out of their very own territory, mostly driven by exaggerated self-confidence, seldom ended well. Today’s FinTech startups have long since rejected this strategy.

Reasons for this are quickly found, because the assets of both parties could not be distributed more differently.

On the one hand, there are the established banks, which operate in what is probably the most regulated market. On the other hand, there are the FinTechs, who can give free rein to their ideas and start developing on a greenfield solutions that focus on the customer.

Both parties are developing in very different directions and can do what they do pretty well. No one else caters like the banks to implement a new regulatory issue in a way that meets the requirements. The ability to develop new initiatives, business models and ideas is much less pronounced. A further advantage and great added value of the traditional and established banks is their existing customer portfolio. The FinTechs, on the other hand, have the opposite problem: they have no or a very small customer base. They are also bubbling over with new ideas and developing solutions consistently and quickly upon customer needs. When it comes to integration into existing legacy systems and the implementation of regulatory requirements, they find it extremely difficult and tend to massively underestimate this effort, even in their calculations. Some good ideas have already failed due to the regulatory requirements of the banking sector.

How do you bring both sides together?

The challenge now is to bring the two sides together and let each party ride its hobbyhorse. For this there are some successful models as already mentioned above.

The approach of taking the best from both worlds and not wanting to do everything yourself can then turn out to be a successful model for both sides. We were able to see this very clearly at this year’s FinTech Week in Hamburg in mid-October. It was already very noticeable that there was a cosy relationship between banks and FinTechs; this would have been unthinkable a few years ago, since no one left out any possibility of blaming the other for his shortcomings.

BaFin also made it clear that there is no way around her. Personally, I was particularly influenced by the appearance of the BaFin President at an event in Berlin. This appearance was of inimitable transparency and made it clear that the limiting elements and compliance requirements of banking supervision cannot be bypassed by FinTechs and he also clearly pointed out that only companies are successful on the market that deal with this, either themselves or in cooperation with existing institutions.

In addition, legislation has become much more liberal and open to the market. Special FinTech committees have been set up to accompany and facilitate market entry, and the registration hurdles have also been significantly lowered. Dialog was also the driver here.

So, there is a lot of movement in the market from all sides, the participants are moving towards each other, sharp-tongued comments on the “old bankers” from the young wild ones and the “wait and see what happens” comments from the establishment are forgotten.

The discussion panels of the FinTech-Week seemed a bit, almost boring, because there was no dissent. Rather, it became clear that FinTechs would like to win the banks as partners and not to see them anymore as opponents. During the presentation of the “Big Four” from Hamburg at a panel discussion, it became clear that the problems of the FinTechs are by no means caused by the banks, but rather of an organisational nature.

On another panel, four successful FinTechs showed what concrete role banks play in cooperation and how important they are. Sutor Bank, as one of the institutions that consistently pursue the path of cooperation, made it clear how it can succeed and also bring added value for the institutions. The difficult regulatory issues were dealt with by the bank and made available to FinTechs. These focus on developing a viable business model that can also be successful in the longer term. In this context, the Solaris Bank should also be mentioned here because it has been consistently pursuing this model for some time. So, everyone has contributed their assets optimally and a long-term partnership is exactly what both parties need.

In summary, it means what?

It can therefore be concluded that cooperation can be worthwhile for both interest groups, but they must be managed in a meaningful and sympathetic way. In some cases, OSTHAVEN has already successfully supported projects and brought market participants together within the framework of considerations regarding cooperation between different market participants. Based on this experience, we know the frequently occurring difficulties from both sides and have developed sensible, coordinated solutions.

„Bank diversity in the conflict between innovation and economic efficiency“

Bank diversity in the conflict between innovation and economic efficiency

POSTED ON 06. November 2018 BY JAN BRINGEZU

Continuous decline in the number of German banks and savings banks

According to the German Bundesbank, there were 1,823 credit institutions (banks and savings banks) in Germany at the end of 2017; compared with 2007, this represents a reduction of almost 20 percent.

According to the Savings Banks Association, the number of savings banks alone has fallen to 385 (a decline of 28) since 2015. The reduction in the cooperative financial sector in the same period was actually 106, down to 915. The Federal Association, BVR, is expecting further mergers, although at a lower level this year, with a total decline of the number of institutions of 57.

For example, in recent years the number of mergers among savings banks has risen significantly. The drivers are, of course, digitalisation, and also the increasing regulation in the financial environment and demographic developments. It is interesting to note that the total number of savings banks fell from 594 in 1998 to 390 as at 31 December 2017 – without one institution being closed.

The numbers of the past therefore speak a clear language; this is further reinforced by the ongoing reduction of branches in Germany. On the one hand, this is also a reaction to the digital transformation and the resulting less and less stringent requirement of the branch as an information and distribution channel. The digital offerings of banks and savings banks (or alternative marketplaces such as Interhyp, Finanzcheck or Zinspilot) are increasingly becoming the primary “banking channel”. On the other hand, Germany, as one has been reading for years and years, is overbanked. In my opinion this applies especially across all institutes, especially for the number of branches (ok, less and less in rural areas …). It is still not uncommon for three branches of an institute to be found in one street of a major German city.

What’s the next step?
How will the trend develop in the future? Will there be a further development or will the “bank dying” continue? Just by the way: no savings bank or cooperative bank has gone under so far; there has only been mergers within the respective banking group, and only very few can remember the last demise of a relevant private bank – since 2001 the deposit guarantee fund had to bear the costs for only 10 insolvent banks, the last was the Dero Bank in February 2018?

Management consultancy Oliver Wyman paints the future of German credit institutions completely black; it assumes that, due to the increasing importance of FinTechs and the large IT groups such as Google, Apple, Amazon and Facebook, the number of German banks could fall by 2030 to 150.

There have been intensive discussions in (not only) the social media about the prediction of the colleagues and one can think what one wants of the lurid lead story, but all are unreservedly of the opinion that the number of banks will continue to decline. The experts, however, are not in agreement about the consequences of an ever-decreasing diversification of the German banking landscape, and the question should also be put as to whether a merger of two (or possibly several) institutions would solve the fundamental problems that drove these institutions into considering a merger in the first place.

At the moment it is being hotly debated, and some politicians, economists and media even demand that a merger between Commerzbank and Deutsche Bank should come about. The question of the meaningfulness is therefore more important now than ever. This question will be explored in the following with the help of a few (yes, even provocative …) theses.

Does a merger (or a takeover) solve fundamental problems for German banks? What problems does a merger cause?

Thesis I: Mergers do not pay off
There are examples where it is worthwhile for one bank to be taken over by another (or where it is planned that it will pay off …). A current example is the takeover of Düsselhyp, which is currently being wound up, by Aareal Bank. Although this example is not really suitable, as Aareal has no strategic interest in Düsselhyp, but only wishes to exploit positive one-off effects within the framework of the settlement.

In reality, however, the situation is different for real mergers and acquisitions. You only have to think of the ongoing attempts to create a uniform IT platform at Deutsche Bank; Postbank is still largely running on its own. The Magellan project, which was supposed to create the basis for a uniform platform, was stopped by the bank.

The creation of uniform and integrated IT systems is always connected with the change of IT systems and the requirement of process adaptations and data migrations. Although the reason for the change in the core banking system of apoBank (from Fiducia GAD to avaloq) is not a merger, the estimated costs (“low three-digit million range”) serves as a benchmark for the IT consolidation of an institution to be merged. You don’t have to look very far for further examples, you can find them in all sectors of the German banking landscape.

If one now thinks about a merger of Deutsche Bank and Commerzbank, then a merger can only pay off with a uniform IT platform; and here neither bank has a uniform infrastructure when viewed individually. Rather, in a merged institution, components of Deutsche Bank, Commerzbank, Postbank, the former Dresdner Bank and other subsidiaries of both banks would then be found. … This list could be extended to include the fact that the Commerzbank will soon have its securities business handled by HSBC and payment transactions by equens, but the Deutsche Bank is taking a different approach here.

It is difficult to imagine a scenario in which such a mammoth task could ever pay off. Especially since the longed for (at least) European champion for many years would be almost exclusively concerned with itself. A fitting transition to …

Thesis II: Mergers are innovation killers
Innovations have a hard time during a merger project, because the securing of the set goals (standardisation and streamlining) is the highest priority after the securing of the daily business. Innovations (in the eyes of many bankers still only betting on future earnings) are not given sufficient attention and are repeatedly put on hold in such phases, which often means nothing more than their discontinuation.

And even after a merger has been completed, things will not necessarily get any better. There are voices (among others, the well-known “influencers”) that yearn for a comprehensive consolidation of the German banking landscape, in which only a few banks would then have plenty of time, money and leisure to finally devote themselves to the creation of innovative solutions for their customers.

I think this is a misconception; competition is a driver of innovation. If market shares are only distributed among a few providers, banks will become more and more comparable in what they offer. In addition, for reasons of convenience, there is increasingly less the need to win new customers with innovative ideas. Evidence of this is that in recent years innovative ideas have come from the diverse FinTech environment and less (or not at all?) from established banks.

The comparisons repeatedly made with countries in which there is more limited banking diversity are not accurate. A BBVA or an ING is not innovative because there are fewer banks in its markets, but because the structures and the reduced importance of (association) “politics” make it possible (and the entrepreneurial DNA dictates it to them).

Thesis III: Mergers deprive local banks of their regional roots
Regional institutions, and these are in particular (but not only) cooperative banks and savings banks, are defined above all by their connection with (the people and institutions of) their region. This is reflected in the social commitment (e.g. the support of sports and cultural facilities or the supply of structurally weak regions) of these houses and in the loyalty of customers to their banks through generations.

But what is the increasing wave of mergers between savings banks and Volksbanks and Raiffeisenbanks in the region in recent years doing with the people? Suddenly the people in Flensburg and North Friesland have a joint savings bank and the customers of the Volksbanks in Frankfurt, Griesheim and Maingau have a new large joint institute. Will there still be room for regional roots after such mergers? This does not always happen silently; for example, there is a petition to reverse the merger of the savings banks Schweinfurt and Eastern Lower Franconia. The integrity of many houses is no longer guaranteed by the dilution of the regional principle.
These three theses are not intended to present mergers between banks as meaningless, as there can be very good reasons for them. Mergers can serve to save banks and thus to achieve economic stability. Mergers can also make strategic sense. However, there are no automatisms that mergers or acquisitions are always worthwhile; two weaknesses do not make a strong one. The weaknesses of the individual partners (e.g. IT legacy, lack of innovative strength, no future-proof business model) will then only be merged and, possibly, further exacerbated.

A Plea
This contribution is intended to be a plea for maintaining diversity in the German banking market. It would continue to be desirable to have large and small as well as regional and international banks. Traditional institutions and challenger banks, multi-channel and mobile only, investment banking and sustainable banking … everything should continue to be typical for our banks in the future!