The delicate balance between bank-FinTech competition and collaboration continues to teeter in the U.S.
In a market without Open Banking regulations, FinTechs continue to enter in to the market, collaborating with bank partners to offer their own financial services — which often compete directly with other financial institutions. New research from Accenture pointed to this trend and its particularly large impact on the payments sector.
According to researchers, FinTech startups threaten to take a $280 billion piece of banks’ payment revenue pie by 2025 with their competing services — worth 15 percent, reports noted.
Its report, “Banking Pulse Survey: Two Ways To Win,” focused on payments behavior across both consumers and merchants, exploring financial institutions across 22 countries. Analysts found that FinTechs’ ability to offer free transaction services could take the greatest portion out of banks’ payment revenues streams, followed by instant payments and app-based virtual wallet services.
“Rather than being at the forefront of the new wave of the booming payments market, banks are feeling the heat from new competition and seeing their margins squeezed,” said Gareth Wilson, Accenture’s global payments team head, in a statement earlier this week. “We face an inevitable world of instant, invisible and free payments, which spells trouble for banks that don’t want to be relegated to the plumbing of payments.”
However, separate analysis from CB Insights paints a different picture as to how banks are reacting to this payments paradigm shift.
According to its latest research, some of the U.S.’s largest banks, including Goldman Sachs, Citigroup and JPMorgan, are among the biggest investors in FinTechs, with a particularly large focus on payments technology startups as FIs remain on-track to meet last year’s FinTech equity deals (2018 equity investment levels saw a 180 percent increase from 2017’s levels, reports said).
CB Insights found Goldman and Citigroup are the most active of the top banks to invest in FinTechs via their venture capital units, with top financial institutions using these funding strategies as a way to “future proof” their own operations. Investing in these would-be competitors allows banks to either integrate their solutions or acquire them outright, often a more efficient way to elevate their financial services products and make improvements necessary to meet customers’ changing demands (a direct result of FinTech competition and innovation, experts say).
“The question is still whether FinTechs are friends or foes — and if they have the ability to gain market share from banks,” said Wells Fargo senior bank analyst Mike Mayo in an interview with CNBC. “On the friend side of that, they have the ability to help banks with technology.”
Payments and settlement is the most popular investment area for top Wall Street banks, the report found, followed by capital markets, data analytics, and accounting and tax services.
“Acquiring digital talent has been a top priority for all banks as they strive to become more tech oriented,” CB Insights said.
The report pointed to Marcus, Goldman Sachs’ consumer financial services unit that rose from a string of acquisitions to build out its digital product offering.
But acquisitions and investments are also being made as banks focus on the small business and corporate financial services side of things.
Last week, for example, JPMorgan announced the introduction of same-day deposits for small businesses that use WePay to process card transactions. Funds from those payments can land in their Chase bank accounts same-day, the result of JPMorgan’s acquisition of WePay in late-2017, reports noted.
In an interview with CNBC, WePay Chief Operating Officer Tina Hsiao said that the service helps JPMorgan “diversify the overall business.”
“We fit a certain product set, and can underpin all of JPMorgan’s small business merchant payments, which could be a big future revenue generator.”
That mindset suggests that while Accenture analysts warn top banks that once-lucrative revenue streams may dry up thanks to FinTech competition, some of the major FIs have already acknowledged that shift and used FinTech investments, acquisitions and collaborative partnerships to introduce new revenue streams in anticipation of competitive forces.