In this guest post, Lee Britton, commercial director of Prepaid Financial Services, contrasts the fortunes of fintech startups that choose to scale with the backing of major banks with those that opt to go it alone.
When looking at the current relationship between fintech startups and banks, it seems that collaboration has replaced disruption – at least on the surface.
While it may appear that banks are providing support to fintechs in a number of different ways – through venture funds, incubators, hackathons, and partnerships – the reality is that banks need to focus on their core business, and therefore may not be best placed to invest in a startup looking to grow their business.
Banks are recognising that by unbundling banking products, they can reach more customers and provide a better service through optimising key areas. However, banks are typically not able to invest time and resources into developing the technology to achieve this.
As fintechs typically specialise in niche areas, such as payments and FX, and look to offer an improved way of delivering these services to their end users, banks are recognising that they could provide the perfect solution. Banks can take fintech startups under their wing, and the newer and more specialised company can then set its sights on improving one area of the bank’s expansive financial services portfolio.
Fintech startups are, to an extent, reliant on incumbents too. Banks can provide access to regulatory licences and banking rails and infrastructure, and while access to Faster Payments/PSD2 will go some of the way towards helping fintechs gain independence from the incumbents, it will be some time before we see these new legislation fully rolled out.
Established and experienced financial institutions are providing support to fintechs in a number of different ways, and there are a number of good reasons for a startup to follow this route in order to grow their business.
Access to infrastructure and managing the regulatory side of things are two areas fintechs often find challenging. Banks can provide both, and have a wealth of knowledge in both of these key areas. In addition, established financial institutions can open doors to global markets and put them in front of existing customers. Banks also have a level of authority that many customers associate with trust and a guarantee that the financial products and services offered will keep their money safe.
Jumping on the bandwagon?
For startups looking to be acquired, collaboration with an incumbent may be the best option. However, some banks are simply jumping on the fintech bandwagon, appearing to launch programmes just to show they are doing it, when in reality it is done more for the sake of PR than genuine interest in investing in a startup.
Even banks that are serious about developing innovative products in niche areas with a fintech partner may attempt to utilise and control the product, resulting in the fintech becoming at risk of becoming absorbed by the larger entity instead of being seen as a partner. Fintechs are also used to working in agile and creative environments, and might find developing a product for a highly regulated entity to be too stifling.
There is no doubt that with the right strategy and team in place, a startup can become successful without needing to collaborate with a bank.
Startups are often savvy about ways to raise the capital they need to finance their business ventures on their own; however, overhyped funding rounds that created the fintech ‘unicorns’ have not done the sector any good, making investors nervous. Powa Technology, for example, failed to generate a return on investment, and without a growth strategy in place, haemorrhaged money before filing for administration.
Finding customers can also be a huge issue. New entrants often take the route of giving it all away for free to entice customers away from incumbents, but this isn’t making them any profit. Without money coming in, though it might appear the business is growing, there is no real scope to scale. In this situation, no amount of funding will be able to mask the fact that there is no viable way of scaling the business into one that is profitable.
Having an experienced team with vast and specialist knowledge is crucial. From a legal adviser that keeps on top of new regulations, to a project manager who can advise on how to get a new financial product to market, banks tend to have the edge over startups amidst the complexities of the financial landscape.
Startups also come up against problems when looking to obtain the necessary licences to become regulated, when trying to access banking networks directly, and with the lack of a robust sandbox environment that allows them to safely test new financial products prior to launch.
A helping hand
Established and profitable fintechs that have developed relationships with banks and have the necessary licences to provide a testbed for new products, as well as the experience in the sector, could be another option for startups.
These fintechs are still small enough to assist startups with building their business without being distracted with too many other concerns, but are large enough to offer the experience, regulatory support and access to banking infrastructure that are critical for new entrants. After having been through the same process when growing their business, more established fintechs can provide support when necessary, while understanding that startups thrive when they have the freedom they require to develop their products. This means there is less pressure to deliver within a certain timeframe or to stick to a rigid plan.
All things considered, no matter what route a startup decides to take, in order to be successful, they must ensure that they are adding value with a disruptive product that is capable of delivering a better service to customers. Without this, like any business that tries to solve a problem that doesn’t exist, there is no chance of success.
To find out more about Prepaid Financial Services, visit the company’s website.
Lee Britton joined Prepaid Financial Services in 2011 as commercial director to drive all sales activities, having worked within the payments sector for over 20 years previously. During this period, Lee was one of the co-founders of an issuing processing platform that was certified globally via Visa and MasterCard and launched programmes in USA, Antigua, UK and Australia. He also founded and launched Altair Financial Services Ltd., a highly successful prepaid programme manager in Europe.
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