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David vs. Goliath: Can fintech really disrupt the financial services industry?

The story of “David versus Goliath” originally narrates how a giant Philistine warrior was defeated by the young David, future king of the Israelites. In modern usage, the phrase has taken a popular meaning, referring to an underdog situation, a contest where a smaller, weaker contender faces a much bigger, stronger opponent and win in an unusual or surprising way. Several articles I read over-used that phrase when describing the battle between banks and fintech start-ups. But is it really accurate?

What has allowed fintechs to accelerate?

To start with, I cannot help somehow but think banks deserve their fate. Until the 2008 crisis, they benefited from an uninterrupted monopoly over financial services which started to erode as customers trust was fading away (these institutions were not “too big to fail” in fact!). On top of that, banks took their customers for granted which in return grew dissatisfied by how they were treated and the inertia in terms of innovation and new services offered by banks.

The traditional institution’s struggle to win back customers trust and people increasing receptiveness to new solutions left the door open for new entrants to enter the picture and offer products and services, poaching customers away from banks. While the big players were too busy firefighting the consequences of the financial crisis and dealing with increasingly complicated regulations, new entrants were focusing on innovation and tailoring products and services customers needed.

Will banks suffer the same fate as dinosaurs?

Even though there are over 6000 fintech start-ups active, disrupting every single aspect of the financial services industry such as borrowing/saving (Lending Club, RateSetter), international money transfer (Transferwise), payment process (ApplePay, Square or Braintree), investing (Betterment, Nutmeg) and banking (Monzo, Atom Bank), only 39 are valued at over $1 billion.

On top of that, if we look closer at the numbers, we realise these fast growing unicorns are still tiny. While banks make business in trillions, many fintech start-ups “only” deal with billions.  Let’s take the example of Lending Club, the biggest fintech lender, who granted over $26 billion worth of loans since its launching in 2007 - compared to $885 billion of credit-card debt in the United States alone.

Banks benefit from established advantages such as their capacity to create substantial amount of credit and the ability to store customer’s money, keep it safe and permanently available (through the current account). Few new entrants wish to take on that heavily regulated responsibility, while many admit they depend on it.

However, this is not enough guarantees for the banks who will not risk to see their business become obsolete and prefer to react to the disruption. In many different and surprising ways.

Some, such as Barclays, Santander, Deutsche Bank and Wells Fargo support internal incubation in the hope of cultivating their own game-changer. New entrants can reap huge benefits from these accelerator programmes: Barclays, on top of the co-working and event space, offers successful start-ups access to their APIs, data and guidance in building and refining their business models. Wells Fargo grant up to a $500k investment for a minority equity stake in the company to successful participants.

Other established players prefer to leverage their size and assets to simply buy-out competitors. It is not a revolutionary process but a rather effective one. BBVA, the Spanish bank, made several M&A moves recently as it is aggressively pursuing to be a leader in the next generation of financial services. It bought Holvi, an online bank for entrepreneurs and SMBs based in Finland. It enabled the BBVA to bring in new business and diversify its revenue stream. Goldman Sachs is also known for making multiple acquisitions of financial services start-ups, including financial data provider Kensho, lender On Deck and broker Motif Investing. Nevertheless, communication, employee retention and culture challenges must be addressed early or else the deal might end up in a complete failure.

Is collaboration the way forward for banks and fintech start-ups?

There are plenty of opportunities for traditional players and fintech start-ups to coexist. For instance, UK business funding firm Ezbob, who initially aimed to disrupt the lending landscape by providing loans to SMEs through its platform. The start-up streamlined the traditional institutions lengthy loan approval process and white labelled its platform to banks which enabled RBS to use the technology to create Esme Loans.

It seems clear that collaboration is the way forward for Banks and fintech, however, I cannot help but feel sceptical when it comes to disrupting the financial services industry. I thought start-ups would change the game and empower customers, but it seems like the big institutions are using their tools to beat them at their own game. Most of these entrepreneurs understood quite early that their best fate is to get acquired (and likely forgotten).

To conclude, I don’t think the phrase “David vs. Goliath” is the most adapted to the situation banks and fintech start-ups are facing. Even though some truly innovative benefits for customers came up over the past decade, I think start-ups disruptive drive tends to lose momentum once they get to play with the big boys.


About the author

Medy Ract
Medy Ract
Medy is an Associate Consultant working within the Business Model Transformation practice and specialising in Financial Services. His professional interests lie in FinTech and Digital Transformation. He is finishing his current project at the end of August and he is looking for a new challenging but rewarding opportunity in digital transformation or regulatory delivery.

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