Fintech and banks, a collaboration made in heaven

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Following the 2008 financial crisis, across Europe suffered heavy losses. Regulators have had to intervene to harden their financial requirements. As capital became a rare commodity, many have had to restrict their lending activity or offer less attractive conditions to their borrower clients. SMEs, typically companies with less than €50m of turnover, have been most penalized. In France this year, SMEs represent a highly significant 99.8% of all companies, and 46% of GDP. Their contribution to employment is even more significant. They are widely considered as engines of growth. Whether they are in the service or industrial sectors, expanding companies need financing. Their growing success often translates in rising working capital requirements and receivables financing. Not long ago, many of these businesses would have naturally gone to their banks to fill these funding and investment needs. Today, their banks have to turn down a certain number of those credit requests.

This context has favoured the rise of alternate forms of financing. Many innovative new ventures have been created to offer non-banking financing solutions. These new players do not suffer from the banks’ capital constraints because most of them do not warehouse risks like traditional banks do. Indeed, their business model consists of connecting those in need of financing with investors or savers willing to take on these risks. A new wave of financial disintermediation has emerged.

The digital revolution has enabled this disintermediation wave. It allows new entrants to promptly and economically access vast numbers of prospective clients via the internet, bypassing traditional branch networks. Furthermore, information has also allowed these new “” ventures to assess the creditworthiness of borrowers without having a historical relationship with them. By using existing market data, they are able to model credit risks at light speed and provide their clients with instant responses. On the other side, they have made the best use of the risk dispersion techniques that securitization allows.

Much is said about fintechs entirely replacing traditional banks in many areas of financial services. While there is indeed some healthy competition between the two, there are also significant cooperation opportunities. Traditional banks have large numbers of SME clients which, for many good reasons, are happy to maintain a one-stop shopping relationship with their bank. On the other hand, fintech companies have, with great effectiveness, developed niche services but do not expect to be their clients’ only financial service provider. Therefore, cooperation is an obvious next step. Let’s take the example of factoring. A traditional bank may find it advantageous to direct its customers to an alternative form of financing rather than developing its own. Such a platform can operate on an open-architecture basis, providing customized services to the clients of its bank partners. The bank may also invest in the securitization funds managed by its fintech partner.

Fintech startups do not aim at reinventing the wheel. They aspire to identify sources of efficiency and scale, and adapt them to today’s collaborative era. With regards to factoring, the new online model places the focus on customer experience, providing a faster, more accessible and cheaper form of financing. Flexibility is key and many modes of collaboration between banks and fintech are possible.

It is not surprising that an increasing number of banks are faced with the decision of whether to build their own online lending platforms in-house or whether to collaborate with the disruptive technology firms. The cooperation rationale is so compelling that a number of leading banks have already embarked in promising partnerships with fintech startups, whilst giving them space to succeed.

JP Morgan, for instance, has teamed up with OnDeck, allowing them to speed up the process of providing loans to its 4 million small-business customers at a drastically faster pace than otherwise. The alliance of JP Morgan’s relationships and lending experience with OnDeck’s technology platform enables them to offer almost real-time approvals and next-day funding. Santander has done the same whilst partnering with Funding Circle and then Kabbage.

JP Morgan and Santander are known to be well-managed and apt to seize opportunities, which further emphasizes the emergence of a trend that we can imagine will flourish. The advantages for both partners in each of these cases are clear: one provides the customers, the other provides the product and service experience whilst risks and revenues are shared. Furthermore, the collaborations enable JP Morgan and Santander to make a real breakthrough in the SME market, which has traditionally been the backyard of local and regional banks.

Similarly, the French start-up Linxo has been very attractive to banks. This company offers an app which aggregates information such as transactions and balances from several accounts to help users manage their budget. Credit Agricole, number one retail bank in France, became one of Linxo’s leading shareholders. This partnership helps supports the rapid growth of Linxo in France and initiates a new phase of international growth. On the other hand, the bank benefits highly from collaborating with Linxo, interested in the data they aggregate. Fortuneo also partnered with Linxo to offer a multi-bank account aggregation tool.

ING, the leading Dutch bank which pioneered direct banking in the 1990s, pays particular attention to technology and disruption, innovation being at the heart of their DNA. Also a shareholder of the fintech Kabbage, they have a commercial agreement to bring Kabagge’s solution to ING’s customers. Both believe that they learn by finding within each other the strength they are lacking. ING puts the emphasis on bringing brand and trust to the fintech, whilst the fintech brings the agility.

The whole fintech sector is still to realize its full potential, but it is clear that it will need coherent action from several parties to reach it. They should aim to become collaborative partners as many have already managed to achieve. It will be together that banks and fintech will revolutionize financial services. 


is CoFounder and CEO at Finexkap