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Grappling With FinTech, Banks May Reconsider Build Vs. Buy

In tech, perhaps more than any other industry, the eternal conundrum is to build or buy – innovation. Innovation is the lifeblood of tech, and it is also the greatest threat to tech firms.

Recent findings by CapGemini in its annual World Banking report show that banks are moving toward the crossroads of the build or buy debate.  And that could be good news for FinTech firms or, rather, the folks who start them up and steer them into the arms of large-pocketed suitors.

FinTech companies have been doing a good job of eating into banks’ turf, and yet it is the banks that are seemingly watching without really acting as quickly as they might or should. “Think big” says CapGemini, but that exhortation rings out with little response.  Through a survey of 16,000 retail banking customers, nearly two-thirds are tapping into FinTech offerings, and 55 percent are looking to recommend families to these tech-savvy firms. Yet only 38 percent would steer those same people to their banks. 

OK, we all know that FinTech is an industry that is based on ease of use and customer friendliness.  But the more startling stats that come out of this survey are these: Almost all banking executives, at 96 percent of those surveyed, know that the trend its toward digital services.  But only 13 percent of those same executives say they have the technology in place to help support a move toward a truly digital environment.  More than that, there seems to be the mindset that banking and FinTech relationships will be collaborative ones, with 46 percent of bankers stating that is the strategy they envision and 44 percent touting an investment strategy.  Only 18 percent say they would look to actually buy a FinTech firm, or the technologies they own.

That last number is a headscratcher.  It illuminates caution the banks cannot afford to have – literally.  The affordability goes beyond the price tag.  But as to the price tag: Valuations are coming down, and though still lofty, could get to the point where traditional banks would want to, and even feel compelled to, pull the trigger.  After all, it costs a lot of money to hire people, develop technology platforms and also bet on the right horse through a process that takes years. 

The payments side of FinTech helps speed ease across borders and across parties such as P2P.  The tentative steps some firms have taken with minority stakes (Visa in Square, for example) may have to become quickened strides.  In the services part of banking – think financial planning, millennials and day-to-day maintenance of accounts – the shrinking of branches and digital handholding need to be introduced with broad strokes.  Through partnerships, banks are sharing some of their most vital currency, which is raw data that is tied to customers.  So in a way, as minority stakeholders, banks may be giving more than they get back in turn. 

It’s not a trend without precedent.  In one example, BlackRock bought online adviser FutureAdvisior, and no less a juggernaut than Goldman took out Honest Dollar. The mindset of buying now to save money later may snowball.

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