Reports of traditional banking’s demise have been greatly exaggerated. High street banks and other long-established financial institutions still number their customers in the billions; by comparison, even the most successful tech-savvy challengers are nothing but niche players.
But the numbers don’t tell the whole story about the often-fractious relationship between legacy finance and FinTechs. Because while old and new money are usually portrayed as deadly rivals competing for finite market share, the truth is that neither can live without the other. The future of financial services does not belong either to the big banks or their digital rivals; it lies in partnership, mutual profit, and a focus on what each of us does best.
Whose grass is greener?
Traditional financial services can be forgiven for looking at FinTechs and electronic money institutions with envy. It’s not just that digital challengers are stealing precious market share, although that’s clearly a major concern in markets like the UK where the top four high street banks lost almost a quarter of their market share in the decade from 2009.
Established financial institutions know they cannot compete with nimble, digital-first startups on the same terms. Burdened with complex legacy systems and technology stacks that can date back to the tape era, older institutions can never hope to match FinTechs on agility, customer insight, new service roll-out and that all-important user experience. And now they’ve been labelled ‘legacy’, these banks can’t help but feel like they’re on the wrong side of history.
But, strange as it may sound coming from an EMI, banks should count their blessings. Your neighbour’s grass is always greener, and not everything is rosy in FinTech’s garden. Sure, digital challengers are growing fast, but they still have a fraction of the customers of so-called ‘legacy finance’. Given that banking is such a data-driven business, the wealth of customer information that banks hold on their billions of customers is a huge competitive edge. But that’s not even their most important strategic advantage. The future of money ultimately depends on banks’ greatest legacy: their infrastructure.
Internet analogy
The internet provides the perfect analogy for established banks’ continued relevance. Just think: do digital service providers like social media or eCommerce build their own national or worldwide fibre connections? Of course not: they piggyback on the public internet, providing profits for infrastructure providers and their other partners.
Companies such as ours are aiming to build the financial networks of the future, but we can’t do it alone. Every FinTech faces a practically insurmountable challenge when we try to scale: it’s not just winning over customers to our platforms, but all the back office work required such as obtaining local banking licences in each jurisdiction, partnering with in-country banks, and connecting to local payments infrastructure.
The relationship between ‘legacy’ finance and FinTech should be exactly the same: banks have first-class, worldwide payments infrastructure in place, together with customer accounts by the million. They have a ready-made marketplace, relationships with regulators, and international presence. FinTechs, on the other hand, have the vision and capability to deliver new breeds of data-driven, insight-rich, highly personalised and above all affordable financial services for the digital generation.
Phoney war
While FinTechs are perfectly placed to build next-generation financial services, including through partnership with providers like Ripple who can circumvent international borders through the blockchain, we need an infrastructure on which to deliver them. That’s why the ‘war’ between legacy and FinTech is a phoney one. Since both sides have what the other one craves, our future lies in combining banks global reach with FinTech’s vision, to the profit of us all.
Don’t think that this ‘piggybacking’ is just one-way traffic. For banks, the value of partnering with FinTechs is that they don’t have to develop new services and payments infrastructure themselves but can adopt and roll them out to their existing customer base. And that benefits both parties, enabling each play to their particular strengths.
By allying with FinTechs and EMIs, traditional banks can keep their role as payments processors, but on a much larger scale than before; meanwhile, their partners will shoulder much of the burden of customer service and support. This is a costly and time-consuming business for banks and, let’s face it, digital firms are better at it.
These relationships should enable banks to deliver a range of new services, including low-cost international transfers for their retail and business customers, providing them with new revenue streams, greater reach, and fresh relevance in a market where customer expectations are changing so rapidly.
Maturing sector
Maybe a few years ago, the idea of allying with a FinTech would be fraught with risk, adding a layer of uncertainty between them and the customer, and posing existential problems about compliance, fraud, AML and KYC. But that’s no longer an issue: FinTech is a rapidly maturing sector where regulatory oversight is as strict as for traditional banks. What’s more, FinTechs already use the same monitoring as banks, or have already developed best-in-class systems themselves.
Partnership will make us all powerful, enabling us all to streamline our operations and focus on delivering more agile, faster, innovative and more comprehensive services with greater appeal to customers. Above all, it enables us to do what each does best, relieving visionary startups from the all-consuming worry of how they will scale, while ensuring banks are assured of their continuing relevance in a rapidly changing market.
The grass always looks greener from across the fence. But FinTech and traditional finance need to see each other as neighbours and partners, not as rivals. With more than a billion unbanked adults around the world and many more with extremely limited access to financial services, there’s a huge untapped market that’s big enough for all of us. So, let’s not talk about ‘legacy’ finance. Their legacy is unparalleled experience, knowledge, and worldwide reach, all of which will be central to a shared future of profitable partnership between the old world and the new.