Global banks woo startups to avoid being left behind by innovation
February 22, 2016: “Traditional bank-to-bank competition is not the issue. This new wave of competition is coming from both nimble, innovative, cloud- and mobile-first startups, as well as the major technology players largely unencumbered by policy and regulation,” says David Lynch, managing director at Hong Kong-based DBS Bank.
Lynch is under no illusions as to the threat posed by startups to traditional banks, saying banks are just as vulnerable as incumbents in other sectors that have been washed away by technological change. “These companies are able to arbitrage their own scale and customer reach to create new revenue streams. For banks, quite simply, we have a choice. We can passively observe and, if so, risk seeing large parts of our business lost to these new entrants,” he said.
The other option, and the one DBS Bank has chosen to take, is actively participate in the creation of a new fintech ecosystem that can benefit both banks and startups equally. The bank has partnered local venture capital firm Nest to launch the DBS Accelerator, which supports startups while allowing DBS to look for – and partner with – startups innovating in the space.
“Working with startups helps us to drive culture change within the bank. Bankers need to learn from these startups. Banks must adapt and those that don’t will not survive,” Lynch said.
Yet, startups also need banks. Derek White, chief design and digital officer at Barclays, says it is clear the financial services industry is changing and that startups are playing a major part in driving that change. But banks can assist such companies with mutually beneficial conclusions.
“If there’s anything that startups need, and that heritage companies can provide, it is customers,” he said.
Barclays is, in fact, becoming the customer itself. The bank has been establishing accelerators as part of its Rise open innovation platform. The latest programme was launched in Cape Town, South Africa, following previous launches in London, Manchester and New York. Another will follow next year in Tel Aviv.
From these accelerator programmes, already almost 30 startups have signed agreements with Barclays. The bank is utilising Austen, Texas-based firm LiveOak’s real-time communication, collaboration and e-signature tool for onboarding online customers. It has partnered cloud-based payroll solution Dopay to allow the startup to leverage its banking licence in Egypt to offer services. There are more, and there will be others in future.
White says the primary benefit for Barclays is the ability to rollout solutions quicker and more efficiently via startups than if the bank did so itself in-house.
“What we’re finding is that it is five to 10 times more efficient for us to work with startups, and three times quicker than when we do it ourselves.”
Another bank that has come to the same viewpoint is Citi, which recently hosted the Citi Mobile Challenge in Nairobi, Kenya, in a bid to identify innovative fintech solutions. Joyce-Ann Wainaina of Citi said while many banks may view new entrants in the space as competitors, it is important to view them instead as potential partners. “We believe gaining direct access to startups in Africa will help accelerate and uncover new opportunities for Citi to develop transformational approaches to banking,” she said.
Though Citi Mobile Challenge developers retain their intellectual property rights for the apps they create, Citi is partnering with these developers in order to help it leapfrog traditional infrastructure.
“The banking industry is redefining itself more quickly now than in recent memory and we believe that we have the opportunity to embrace new ideas and create strong new partnerships around the world including Africa,” Wainaina said.
“The entrepreneurs and small businesses we have encountered through the Citi Mobile Challenge have been inspiring. These innovators are helping us push the boundaries of fintech and reimagine banking. They bring an energy and passion for their work that is driving progress in the industry and fueling our own excitement about what’s next.”
Some banks are taking a less direct part in supporting and partnering fintech startups, but providing financial backing nonetheless. In Cape Town, South Africa’s First National Bank (FNB) has provided financial assistance to local startup support organisation Silicon Cape.
Sanjeev Orie, chief executive officer (CEO) of Business Value Adds at FNB, said the partnership is general, but the bank, through its Vumela Enterprise Development fund, is able to take equity in businesses. Silicon Cape’s entrepreneurs are that pipeline.
The company has partnered with startups before, for its range of FNB Business’ Instant Solutions, which were developed in partnership with a local startup technology company. FNB then bought and internalised these systems.
“We have not partnered or acquired any fintech startups to date. However, each proposition presented to FNB is considered on its own merit, particularly with regard to the business case as well as whether the products and services being offered are deemed to meet FNB’s customer needs,” Orie said.
“The ultimate impact is the ability of small businesses to create employment opportunities. Banks, as financial service providers, perform best when the country’s economy is growing steadily, when there is consistent and strong demand for bank accounts and products. These conditions arise typically from stable economic growth and a working population that is gainfully employed. The role of SMMEs in this context cannot be over-stated.”
Lynch, whose bank recently we kicked off a project with a US-based predictive analytics company and is working with another startup in artificial intelligence and natural language processing, said there are a multitude of areas where banks and startups could partner.
“It’s clear that many of these new startup business models are gaining traction, such as P2P or alternative lending, P2P FX, online and mobile payments and overseas transfers,” he said.
“Many of them are focusing on underserved segments of banking and, as those models are proven, they will scale, and that presents a large threat to traditional banks. We have a choice. We can watch, buy, build our own, partner or participate and learn.”
He has a strong warning to banks that do not heed this advice, saying there is a real risk that if banks lose the engagement layer with a customer, they are resigned to being just the core.
“That can still be very profitable, but it’s a far less exciting existence and it will become commoditised,” Lynch said.