With banking as a service allowing financial institutions to embrace innovation from outside, we are now witnessing a period of accelerated evolution in the industry. With many now making comparisons with the development of mobile as a platform and the emergence of apps, it will transform an industry in dire need of a facelift and bring considerable benefits to both those in developed economies as well as those in emerging markets.
We see numerous advantages for banks in platformisation. Firstly, it enables banks to leverage the brands and market positioning of new market entrants to expand their client base. While financial institutions have tarnished reputations from the various crises and scandals of the last decade, fintech startups have a clean sheet and are successfully positioning themselves as a new generation of players that put their clients interests first. By partnering with fintech companies, banks can also expand beyond their brand’s core demographic.
Additionally, partnerships allow banks to explore new business trends and test business hypotheses without incurring time and resource costs internally and well as gain access to new technologies, as startups are free of the “technical debt” and historical artifacts of software architecture. In the context of more global strategy, the transformation of financial institutions into platforms also provides a highly efficient route to launching tailored products in each market and driving sales without incurring material expenses.
We’re already witnessing the steady adoption of classical banking infrastructure by fintech companies in both developed economies and emerging markets. In developed economies, this has so far focused on rebooting an antiquated banking system. These institutions are burdened with legacy IT and struggle to innovate. Fintech companies are eliminating the friction in the customer journey with improved interfaces, enhanced customer service and lower cost products. There are numerous examples from “neo-banks” to money exchange services and intelligent assistants.
We will likely see many more incarnations, supported by a strong appetite for fintech among venture capital investors, and we’re already seeing traditional institutions acquire these startups – for example BNP Paribas just bought France’s Compte Nickel. By making it quick and easy to open a current account in one of France’s many tobacco stores, the startup had acquired over 500,000 customers.
In emerging markets, where the finance sector is far less developed, new entrants are improving access to competitive financial services. These markets are typically highly regulated, with a limited number of financial services providers. At the same time, they are often vast in geography with a limited coverage of retail banking infrastructure. Furthermore, consumers often lack the traditional credit history files that banks need to approve loans.
Fintech companies can leverage the growth of the mobile internet and availability of data to serve the underbanked and help meet the massive structural consumer demand for credit that is unmet by incumbents. Without the traditional infrastructure costs of banks, fintech companies are able to invest heavily in Big Data technologies, allowing them to assess credit risk using alternative sources of data such as social media profiles and mobile bills.
Indeed, the opportunity for fintech in emerging markets is profound, as increasing access to financial services can have a positive impact on economic growth and living standards. According to McKinsey, emerging markets could boost their economies by $3.7tn over the next decade by embracing the full potential of digital finance. And with middle-class populations now ballooning in these countries, the prime lending market is rocketing.
In Brazil, banks now allocate whole service lines to online lending companies. For example, Simplic (a subsidiary of American Public Company Enova) co-operates successfully with local bank Sorocred. Simplic is able to focus on its strengths – client capture and credit scoring – while the bank takes on the back-office function and regulatory requirements. At ID Finance, we have also chosen a similar model for our partnership with Brazilian bank Socinal Financeira.
Meanwhile in Russia, the national Central Bank and mega-regulator of the country’s financial market is opening up the consumer lending market and formalising the transformation of banks into platforms. We’ve already seen Intercommerz co-operating with mobile banking application Rocketbank and IQCard, which issues prepaid credit cards. Within this partnership, the bank was occupied with organization and accounts management, while the companies attracted clients (including sales outlets in the case of IQCard) by product line extension and user experience optimization. The bank consolidated account balances and online companies gained access to the full-featured banking infrastructure. Interestingly, Otkritie Bank has since announced the acquisition of Rocketbank, providing the perfect proof of classical players’ interest in service companies - which know everything about their clients and are able to develop popular, almost personalised, products.
Far from being a threat to banks, fintech companies are playing the role of strategic partners. While in developed economies banking as a service is improving the customer experience and making it easier for people to manage their finances effectively, in emerging markets it is providing much greater access to competitive financial services. Here it has the potential to improve lives and transform economies. While the banks will be better positioned fend off competition from technology titans such as Facebook and Tencent – which are busy plotting their own unencumbered vision of the future.
ID Finance is a data science, credit scoring and digital finance company. It was recently highlighted in a global fintech report by GP Bullhound as having the potential to become a billion-dollar company.