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

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.