How Fintech Startups Are Helping The Financial Services Sector

Financial technology startups and banks: friend or foe?

It would be safe to assume that financial tech – known as fintech startups – are a small army of David’s in this fintechparticular biblical parable.

Banks suffered a serious knock in popularity after the financial crash of 2007-08 and the subsequent bailout. Stories of excessive bonuses and compensation schemes, whilst millions were put out of work, fueled the popular fire against organisations many still hold responsible for the global financial meltdown.

One response to this was the emergence of fintech startups, hoping to do better than the banks when it comes to customer service, convenience; thereby picking up market share where banks have disappointed customers or failed to capitalise on opportunities.

Fintech Investment From Financial Institutions

Fintech is now worth £20 billion to the UK economy. Over one billion has been invested in London-based fintech startups to date and during the first three-quarters of 2015, there has been £6.9 billion poured into this sector.

Interestingly, those placing the biggest bets on this sector, particularly in London and New York, are the banks.

Barclays, itself once a scrappy young contender – in the 1700’s – launched a startup incubator, in partnership with one of the world’s leading incubator programmes, TechStars. Santander has launched a $100 million fund in July 2014 to support startups. Whereas Visa Europe, keen to capitalise on these newfound opportunities has also launched an accelerator.

Apart from funding and mentoring, why are startups flocking to these bank-backed accelerators?

Aneesh Varma, Co-founder of Aire, an alternative credit scoring service said in an interview that, “Most of the financial ecosystem depends on common protocols. Having one bank as a ‘buddy’ gives you a head start over your competition and helps reassure clients and consumers that you’re okay to do business with.”

At the same time, it is worth asking: why are banks funding potential competitors?

According to the CEO of GoCardless, an online payment service provider, Hiroki Takeuchi, banks are struggling with incorporating innovation. He told The Guardian that, “Good intentions are not enough, banks need to change their ability to take new innovation to market if they want to see a return on their investments in the fintech community.”

Larger organisations have a slower turnaround time when it comes to innovation. Further complicated by policies, procedures, annual budgets and office politics, a good idea could fizzle out internally long before customers can benefit from it. Startups don’t have the luxury of time. Anything they produce needs to get into the hands of consumers, just to give them the chance of surviving, being funded and growing.

In time, banks will most likely absorb some of the best ideas coming out of the startup community. Either through acquisitions or acqui-hires, creating new in-house teams that can capitalise on emerging ideas. Banks can afford to play the long game, whereas startups need to innovate quickly. This combination means customers will see new ideas come to market faster than before. Peer-to-peer mobile payments service Barclays Pingit is one such example.

How Customers and Banks Both Win

The financial crisis was an eye-opener for consumers and banks. One lesson that was driven home in the preceding years is the fact that customers cannot be taken for granted. Restoring confidence meant providing a better service than they had in the past.

In the years since, smartphones have evolved as a major touch point for customer-centric organisations, including banks. Many now use social media as a customer service channel. Banks don’t have that luxury, not with the high levels of security and regulations surrounding customer data and privacy. However, Apps are one-way banks are adapting to consumers needs.

Some in the technology sector think apps are the way to go, eventually heralding the demise of high street branches altogether. The rest of the business community, who don’t look through rose tinted Google Glasses, would disagree. But the evolution of digital services does suggest that banks can, in time, reduce customer service overheads and perhaps some high street branches, to further serve the needs of their customers.

As fintech startups and banks learn to work together, rather than compete, the true winner is the customer, since both are trying to serve them in the best way possible. Each approaches this from a different perspective, with a different range of services, but both are ultimately hoping we will entrust them with our money. As a result, banks and fintech companies are more customer focused than ever, which benefits everyone.