Why The Bank-FinTech Relationship Is More Complicated Than Conflicted

Bank-FinTech: More Complicated Than Conflicted

Pick your metaphor: David vs. Goliath. Knocking the giant off the pedestal. Or, as a recent CNBC article put it, quoting a source, “a mass extinction event.”

The subject?

The ongoing struggle, supposedly existential in nature, that pits upstart, relatively young FinTech firms against arrogantly complacent banks for supremacy in this new and growing world of digital payments and commerce.

Among the latest chronicles of that struggle came this week via a CNBC article, which includes this quote from a 2016 McKinsey & Co. report: “The rise of digital innovators in financial services presents a significant threat to the traditional business models of retail banks.”

Zero Sum?

Make no mistake: Neither the article, nor the viewpoints in it — among its main sources was Stephen Bird, CEO of global consumer banking for Citi — took the position that legacy banks, those stodgy old institutions that served your grandfathers and great-grandfathers well, are hopelessly out of place in the 21st-century digital culture that relies as much, or more, on mobile communication as on personal relationships.

But the article did, in some part at least, convey a point of view that is arguably superficial: that FinTech and legacy financial institutions are engaged in a zero-sum competition for customers and profit, that one or the other side will emerge victorious, leaving the other side in the famous ash heap of history. That POV is reinforced by analysis such as this, which paints those longstanding banks almost as survivors subject to inevitable decline, even as they enjoy reasonably good fortunes.

“So far, at least, global banks are holding up, based on their most recent reporting periods,” the article says. “Citi, Standard Chartered, Bank of America, HSBC and Credit Suisse, for example, all reported third-quarter profit increases from the same period last year. Deutsche Bank‘s earnings, however, slumped.”

Not So Black-and-White

None of this is meant to make too much of a brief item from a respected news source. Nor is it to suggest that the CNBC item – or the viewpoints included in it – are in total error. Instead, as PYMNTS has regularly reported, the situation is much less black-and-white than the article suggests. (And that article serves, for purposes of this rebuttal, as a representative of similar articles that are regularly published on the subject of FinTech firms and legacy banks.)

A recent column published in PYMNTS serves as a good guide for why such viewpoints as expressed in that article seem off-base. In this week’s “Seven Big Threats Facing Seven Big Tech and Payments Players This Halloween” from Karen Webster, she wrote about the evolving relationship between banks and FinTech firms. It’s a bit more complicated than suggested by the CNBC article, to say the least.

For instance, “instead of banks being afraid of the FinTech bogeyman, it’s now more like the other way around,” Webster wrote.

Trust in Banks

Why is that?

A big part of the reason is trust (a trait noted in the CNBC article, to be fair, but not as forcefully as by PYMNTS). “People want to keep their money in a place that consumers trust,” Webster’s article stated. “And that is a bank – one with FDIC insurance and safeguards that keep their money safe. According to our latest Financial Invisibles Report, out of 10,000 adult consumers in the U.S., 93 percent had a bank account. That’s where consumers want to park their money until they need to use it.”

FinTech firms, instead of seeking to break through the banking walls and create a new payments world, are instead “helping to enable many of those innovations for those banks.” That’s largely because “in the last year in particular, FinTechs have understood that payments is a scale business, a risk business and a trust business.”

Don’t just take Webster’s word for it, though. Consider a recent PYMNTS interview with Gerhard Oosthuizen, chief technology officer for Entersekt, a South Africa-based FinTech firm that focuses on mobile authentication and app security software.

He said that when it comes to banks and their mobile efforts, financial institutions operate at an advantage, as they have customer relationships that span years or decades — generations, in some cases — and are often perceived as stable, all-but-eternal institutions, not the fly-by-night operators that regularly seem to pop up in the digital economy.

That said, for banks to translate that trust into consumer loyalty and revenue in this digital and mobile age, they need to design products that emphasize security as much as UX, and to market their products appropriately. And that marketing should build on the inherent advantages of legacy financial institutions. “Banks have that base of trust, and the ability to engage with customers,” Oosthuizen added. As well, banks can do that marketing at places where customers manage their finances — at ATMs or inside branches, for instance.

Conflict in the digital world is hardly fiction or the stuff of pumped-up narrative. Business rivals are battling it out for money, and that’s among the most primitive and fiercest sources of conflict. But there is more to business than basic conflict, and the developing relationships between FinTech and banks shows that.