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FINTECH START-UPS: Leading high-street european banks to rethink the future

FINTECH START-UPS: Leading high-street european banks to rethink the future
September 07, 2017

According to forecast, global investment in the Fintech sector will amount to approximately $8 billion by 2018. It cannot be denied that Europe is largely overbanked, where the financial entities operate in an unfavorable market environment. The likely way forward for the banking system is an evolved blueprint, coupled with a customer and society centric vision. The growth of Fintech is forcing banks to reconsider skills-sets which they require to thrive in the new evolving environment. Major developments such as artificial intelligence and machine learning are already automating routine manual tasks. New technologies are enabling banks to execute tasks online, minimizing human intervention. Justifiably, it was predicted towards the end of last year that European banks would slash over 20,000 jobs.

Fintech startups act like banks

Technological innovations have blurred the gap between financial services startups and established financial institutions. These startups are acting like banks by building similar business models in the areas of lending and money transfer. They are agile, have the ability to think out of the box, and are launching new services at a rapid pace. For instance, peer-to-peer lender Zopa has announced recent plans of an online-only bank that challenges high-street lenders. According to the P2P lender, it will offer term-deposit accounts for the savers and a revolving line of credit to the borrowers.

Rivaling major banks

Backed by Spotify investor, Monese has an e-money license that supports banking-like services. Customers can pay bills, transfer money and apply for a contactless debit card. Using bank-grade KYC checks, Monese can open new accounts in two minutes, further adding to the convenience. In fact, a local address proof is not even required, enabling expats and migrants to open a bank account outside their country and avail banking services which may otherwise be difficult. Users are signing up on the app for primary bank accounts and 74% of the income deposits are people’s salaries. This is crucial, seeking to transform the banking experience for migrant workers who feel that “residency restrictions” imposed by the mainstream banks is one of the greatest barriers to accessing the banking system. For an EU-wide system, this is of significant importance, as economic activity creates more dynamism in the labour markets.

Pressure mounts on European banks

Fintech companies are fast embracing innovation to create products which are tailored to the customers’ needs. In the international money transfer space TransferWise is clearly a leader which operates on a peer-to-peer model. European banks are responding to the threat by looking to transform their business environment, adopting the agility and disruptive mentality of start-ups and focus on customer experience and ease of use. As ING’s CEO Ralph Hamer’s puts it; “We are evolving as a Fintech company. We built the bank around the internet, rather than building the internet around the bank.”. The results speak for itself; ING Bank is one of the largest online-only banks in key markets such Germany.

The current scenario

Banks and Fintech startups are increasingly collaborating with each other. The blockchain-based startup, Wave, is the third firm to ink a deal with Barclays. Their objective is to help business clients optimize supply chain management costs. While blockchain can emerge as a significant cost-saver in the near future, challenges surrounding adoption need to be addressed which can range from cybersecurity concerns, legacy infrastructure to compliance with privacy laws.

A win-win situation

Sustainable innovation helps banks stay relevant in today’s hyper-competitive landscape, the crux of which should be to improve upon established solutions. According to recent research, 25% of established banks consider Fintech startups ideal for acquisition. In the same survey, 35% of the respondents admitted that they would not mind collaborating with the startups. Banks today can no longer depend on linear thinking. Fintech firms have an important role to play here. They have a new way of approaching the financial services industry which is vastly different from the legacy operations. They provide faster and cheaper services than banks, enhancing customer experience, increasing total economic transaction, and bringing in new customers. Banks, on the other hand, help the startups to gain scale and meet regulatory requirements efficiently.

According to recent research, 25% of established banks consider Fintech startups ideal for acquisition.

Impact on Small and Medium Enterprises lending

Customer centricity is an important aspect of Fintech. A survey conducted last year reveals that 44% of those who embraced fintech solutions did so simply because it is easy to get started. All they need to do is enter an email address and download the app. Moreover, Fintech companies are improving the access to finance for small and medium enterprises by connecting them to banks and financial institutions or giving loans themselves. In UK, P2P lending alone accounts for 14% of new lending to SMEs.

In UK, P2P lending alone accounts for 14% of new lending to SMEs

A Way ahead for Europe

Lin Europe, Paris, Zurich, Frankfurt and Amsterdam have emerged as key Fintech hubs. Amsterdam, Netherland’s only tech-centric area, excels in payments expertise and focuses on digital security. Owing to its strategic location, international business climate, and solid infrastructure, the city will only grow in reputation, as Brexit forces much economic alignment and movement of capital back to continental Europe. That has meant that fintech investments in Europe has increased many folds. In the last twelve months, banks such as MarketInvoice and Revolut have raised millions from investors.

Fintech is all set for a next-gen evolution. It will play a crucial role in the strategies undertaken by financial institutions while paving the way for impactful business models. Banks today must view the Fintech ecosystem as an opportunity instead of a threat.