Build, buy or partner? The debate around the path to digitalization and innovation in financial services to compete with fintech and Big Tech has been buzzing for a while. However, consensus seems to be growing in favour of acquisitions with eight acquisitions of fintechs by banks occurring in 2017. This is the highest number in history according to CBInsights. This has been led by BBVA, closely followed by Goldman Sachs, BNP and JP Morgan. The numbers are still small as are the values, and most acquisitions of fintech companies by banks have been in reality the acquisition of talent, particularly technology teams. Banks are looking for technology they can use in their existing business. This instead of having to develop it in-house particularly as legacy systems, regulatory and compliance issues as well as corporate culture holds them back. However, fintech acquisitions are difficult to integrate because the platforms don’t always fit into existing business models or offer an earnings boost. More importantly, most banks are not, in fact, looking to change their business model. Fintechs on the other hand are trying to disrupt and change existing models. Banks need to look at platforms as business models (eg open APIs) and not just technology.
In order to make the most of their fintech investments, banks should absorb some of their practices. They must change the way they look at time frames in their strategic planning to reflect the realities of the market. Three-year plans are no longer relevant. They need to serve a consumer that now expects a more immediate digital delivery of products and services. New technology-driven services can help add new revenue streams, and new processes will make traditional institutions more efficient. They should open banking platforms to external developers to create new services. Also, raise matters concerning technology to strategic board-level including hiring technology-savvy board members. Additionally, technology, traditionally the remit of operations, should focus on improved customer experience to create better products, experiences and distribution platforms. This, driven by new digital communication and commerce platforms.
Fintech acquisitions are often kept separate because due diligence and integration can be difficult. This is due in large part to a cultural disconnect and to prevent a clash between the more traditional bank culture and that of the fintech firm. These issues should be addressed so that banks can face competition from other players. These include digital payments providers like PayPal that is planning to offer more traditional banking services. Big Tech is also interested in providing services to grow their businesses like Amazon offering loans to vendors.
The furore over Facebook during last few weeks may have bought time for banks from potential competition from GAFA as the threat of regulation concerning data privacy looms. However, banks need to take advantage of the moment while only 1% of consumer banking revenues have moved to digital models, according to a study by Citi. They have large customer bases and scale, which fintechs do not, yet.
They should hurry.