Is fintech-banks convergence inevitable?

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Fintech: Born to Challenge

The very beginning of the fintech movement can be traced to 2008 financial crisis and later attempts for the reinvention of financial services by leveraging digital technologies. Since its inception fintech was challenging the status quo of the financial industry. It used to promise (and still does so) to change the paradigm of banking, lending, and insurance services, by putting customer needs at the centre of the business model and making it affordable due to newly available technologies.

Ambiguous result of the competition

Fintech has been challenging legacy banks for years with mixed results. After the first, exaggerated enthusiasm towards the new category of financial players, the more moderate opinion prevailed. Some business models proved to be legit, but some of them still expect reliable validation. More and more examples of actual cooperation between fintech and banks undermined the paradigm of the inevitable conflict between the two groups. Over time fintech companies became diversified, spreading across numerous verticals and targeting different functional niches. Regtech, insurtech, lendtech, and some other kinds of fintech were born.

Convergence became apparent

Some fintech does have competition with banks in their DNA and it’s hard to imagine they won’t be in a constant fight with incumbent banks. Neobanks, mobile banks, and, with some exceptions, digital wallets are great examples. At the very core of their business strategy, we find the replacement of existing banks. This replacement can relate to some customer groups, functional niches or, in the case of universal digital banks, covers all services usually delivered by traditional banks. It means that, on the strategic level, the fintech industry began to resemble banking.

Some fintech strategies require co-operation

It is tempting to state that lately both technology realms have converged. We see fintech catering more for regulatory approvals, scalability and security, banks being more agile and fast in development and more open to the newest innovations in technology. There is more and more co-operation rather than competition between those two. Particularly one model of cooperation becomes popular when a fintech company acts as a technology vendor for regular financial institutions. Banks are looking for technology competence in fintech believing that fintech will bring the value of digital innovation and better consumer insights to banks’ business models. On the other hand, B2B fintech looks at banks as its potential customers.

B2B fintech gets by with banks

The synergy between banks and their fintech vendors is another trend. The majority of B2B fintech, which delivers financial technology for big players, would partner with legacy institutions. Inevitably, it creates many similarities between the two. Project management needs to be unified, which makes both parties accommodate each other. Banks became more agile in their projects, fintech, on the other hand, increased the level of predictability and amount of documentation. When in Rome, do as the Romans do and fintech who starts co-operating with banks naturally becomes a bit like them. On the other hand, the bank that massively uses fintech support absorbs some elements of their culture and copies the way things are getting done by them. Co-operation facilitates convergence.

Fintech completes banks in some areas or become like them

Fintech companies that serve end customers usually address areas where legacy banks are not perfect and compete with different approaches. It makes potential convergence a threat to them, as they could lose their competitive advantage by becoming too much like banks. However, fintech, which tries to be a sort of universal bank, just better, is pushed by regulators to become similar to legacy players. The same requirements and the same regulatory authorities are the powerful reason to converge. Therefore, on many markets, we see popping up projects of regulatory sandboxes built in order to keep the uniqueness of fintech untouched. The challenge is that embarking on the broad waters of the general market requires, again, the adoption of general regulations. Finally, it turns out that when any fintech develops and scales up or applies for the appropriate license, it immediately begins to converge with the banks.

Conversion is what fintech should be afraid

Some convergence is a good trend. It is a kind of learning from the mistakes and successes of others. Every reasonable business would benefit from that approach. What fintech should really avoid is the conversion into a regular financial institution. Becoming just another bank, lender, or insurer is not a good plan. Financial services are already an overcrowded markets with hardly any room for new competitors. Fintech should remain cautious not to adopt too many banking traits. It would weaken their value proposition and undermine their identity.

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