London has gained a reputation as a leading fintech hub, hosting more and more innovative technology start-ups but can they be considered as friends or enemies of financial services? This is exactly what June’s debate from the Digital Banking Club (TDBC) set to find out. Jessica Longley reports on the action
Hosted at the prestigious Law Society in London, and sponsored by global leader of mobile capture and identity verification software Mitek, this June’s TDBC debate took a slightly more traditional approach.
Sophie Guibaud, George Depastas and Jon Hall argued for the motion against a team comprising Simon Cadbury, Roy Vella and David Parker. The motion: fintech, friend or foe? Guibaud, vice-president of European expansion at Fidor, kicked off the debate in support of the motion.
She argued that in spite of a rocky start, the relationship between fintechs and banks have evolved and continue to evolve – with the arrival of PSD2 – into a more symbiotic one.
Fintechs and banks, a symbiotic relationship? Guibaud explained how fintechs were born, painting a picture of a change in consumer behaviour over the past 20 years with the arrival of the internet and smartphones, allowing customers to be permanently connected. This led to the emergence of new agile companies as banks struggled to keep up with the change.
“Banks took a while to adapt as quickly to change as other sectors for a few reasons such as legacy and strict regulation. Organisations have a strong hierarchy and are not used to listening to what customers want.
“For fintechs, it is easier to swiftly develop new products and respond to customer needs because of their new business model and better customer experience,” Guibaud explained.
She further outlined the banks’ and fintechs’ need for each other. On one hand, banks depend on fintechs to better connect with their customers and improve their understanding of their customer base. On the other, fintechs need the investment and brand that banks offer to assert themselves in the market.
Partnerships between the two entities can come in the form of affiliations or through the banks’ use of fintechs’ already developed and tested technology.
Guibaud clarified: “Investments are a way for fintechs to reach out to other audiences that are not their main target audience.
“It is also a way to experiment as it’s always easier to experiment under a new brand than under a 100-year-old brand.”
She illustrated that ‘the P2P lending partnership between Zopa and Metro Bank is a perfect example of fintechs and banks working together hand in hand. Zopa offers Metro Bank clients a service that the bank itself would not be able to offer’.
The end of the “toothbrush era” In response, Simon Cadbury, director of strategy and innovation at Intelligent Environments, made his case against the motion with five concise points.
Basing his arguments on research from PwC and McKinsey, he stated that fintechs are disruptive, steal profits, do not need banks and are a threat to the future of banking. As a result, the traditional players are left undecided and unsure of how to proceed.
He said: “We’re undergoing a natural evolution. You can describe the previous two or three years as the ‘toothbrush era’, where fintechs have been taking one function and performing it considerably better than anyone else.”
Cadbury clarified: “Fintechs are typically bound to be light, free from the burden of meddlesome systems and have smart unbundled business models. The fintechs’ disruptive models can find great synergy in working together rather than bending over backwards to accommodate banks.”
Not only can fintechs survive without banks, they are also threatening banks’ profits as they start to encroach on the end-to-end value chain.
According to Cadbury: “The opposition might argue that only a small percentage of revenue is migrating to fintechs, but it should be the potential that is concerning them. Experts believe that 40-60% of global banking profits worth $1trn are at risk.”
Cadbury expressed his fears that traditional banks are ‘having their no-frills moment, just like the national airlines in the 1990s. They’ve had to accept lower profitability and remodel their proposition’.
He considered that banks are unprepared to face the second stage of advancement of fintechs. Indeed, the future of fintechs is expected to be propelled by the proposition of a launch that will create a central hub for fintechs called the marketplace bank.
Cadbury explained: “The marketplace banks will compete directly with the traditional banks on core banking services without the need to build all the products. And on this model, there’s a very good chance that they will actually scale much more quickly than we’ve seen historically.”
As Cadbury’s speech came to an end, it was the turn of George Depastas, the head of product and real-time analytics at Barclays, to point out the inaccuracies and supposedly false arguments found in Cadbury’s speech.
“You’ve said that the essence of startups is disruption. This is so last year; creation is the new bloc.
“The big players in the market are not trying to chip-in the existing pipe, they are trying to create new markets,” announced Depastas.
Indeed, Depastas is convinced that ‘the pie is large enough to feed everyone. They don’t have to kill each other’.
Banks and fintechs have complimentary sets of skills and resources that allow them to work together. Depastas called it co-competition: ‘cooperation with some elements of healthy competition’.
The huge potential for them to be and remain friends comes from, as Guibaud mentioned, two things.
“For one, fintechs need the funding, branding and established relationships the banks bring. The slow dinosaur banks on the other can benefit from the agile mindset and cutting-edge technology the fintechs offer,” claimed Depastas.
Depastas further proved his point by admitting that very few startups have actually passed the 100,000 users threshold. He explained that these startups rely on banks’ brands to provide their customers with the trust and loyalty they desperately need.
On the other hand, banks cannot survive if they do not jump on the digital wave: they understand the urgency of investing in fintechs.
In his closing statement, Depastas concluded that the $20bn investment in fintechs by banks reflected the confidence banks have in start-ups: “Fintechs have proven that essentially they want to participate in the wider ecosystem. They want to optimise processes and build on top of APIs.”
Biscuits, piranhas or electronic cars? Speaking for the opposition, David Parker, CEO of Polymath Consulting, and Roy Vella, digital expert and consultant, chose original and quirky analogies to express their opinions.
Parker dubbed banks the ‘manufacturers of rich tea biscuits’, and introduced fintechs as the ‘Tesco providing the rich tea biscuits’ to explain how profits depend on who knows the customer best and who controls the margins.
In short, Parker showed the dependence of banks on fintechs for customer data.
He stated: “Fintechs, with all their weird and wonderful logos, are building brands and emotional relationships to their customer base. Banks are purely manufacturers; they have no understanding of where the market is going and no idea what the consumer is looking for in the future.”
Parker argued that fintechs could not be considered friendly when they were effectively taking profits away from the banks. “A profit pie was mentioned. It’s a bit like a balloon. I don’t believe that profits go up and up until that balloon explodes. There is only a certain amount of profit available.”
According to Parker, fintechs are now serving the profitable customers of that profit pie while the banks are left with the unprofitable customers: “[The banks] are left with the commodity-based wholesale business.”
As a dramatic conclusion to his speech, Parker specified: “This lack of real customer insight therefore becomes self-fulfilling.
“The less you understand about them today, the less you understand about them tomorrow and the less you know about them in the future. Fintechs will leave with 60% of your profits in the pocket.”
Vella backed Parker’s arguments up by creating his very own analogy around sea animals. He first described the paradigm shift financial players are currently facing.
In this highly connected world where the global digital participation is unprecedented, there is ‘in Murdoch’s words, a significant dynamic of the fast being the slow’, explained Vella.
“We are no longer in waters that worry about great white sharks, but rather we are now scared of the little players taking little bites. Piranhas are cute when you see a picture of them, but once you zoom in on the teeth, they become threatening,” admitted Vella, insinuating that piranhas are the fintechs and great white sharks are the banks.
Vella concluded that we no longer need a middleman, such as the bank, in a world where we have diversity and choice.
Jon Hall, in favour of the motion, fought back the opposition by playing into their analogy game. He decided to compare fintechs to Tesla, arguing that Tesla is a company that turned electric cars from geeky to cool and accessible.
Hall explained that fintechs are to financial services what Tesla is to the car industry: appealing to a niche market and developing through innovation and understanding of the customer.
Hall commented: “Fundamentally, fintechs are advancing in gaps. They are dealing with underserved markets, they are listening to what customers want and they are there responding to customer needs. It is about a social purpose more than a numbers game.”
Hall disputed that by working with financial services, fintechs were demonstrating their maturity, sustainability and scalability. He believed the recipe for success for banks was a combination of two things: “Financial services need to be emotional and rational as well. They need to perform and they need to look good.”
The bloodbath As moderator Douglas Blakey, group editor of consumer finance titles at Timetric, opened up the floor to questions, the panel got their claws out to fight it out one last time before the results.
When asked about how fintechs could be considered foe when they need such high capital requirements to survive, Vella replied: “The aspect that you’re missing is time.
“When it is explained that there is a potential to hack into the $1trn industry and that all the current players are dinosaurs, there is money to be had.”
An audience member reiterated the question: “Are they a foe now or in 20 years’ time?”
Vella took up the question once more: “You stole my thunder! They may appear to be friendly at the moment, but time is the factor that people are not considering.”
Guibaud retorted: “Fintechs need larger players over time. If you don’t have the capital, you need to stop.
“A lot of investment money needs to be spent on marketing to actually reach out to people and build a customer base.” Another member of the audience added: “Let’s assume it is 10 years from now. Describe what the world would look like after all these great partnerships.”
“[Fintechs and banks] will be able to go the extra step. Fintechs feel there is a gap in the market and can offer services that banks can’t; such as loans to high risk customers,” Guibaud replied.
Depastas regretted to say that it is ‘hard to imagine the future in three years, even more so in 10’.
He stated: “You go to banks for their over all package. Insights, advice… Customers want specific offerings from fintechs but are still customers of the big banks.”
Parker shut Depastas down by affirming: “Certain things are predictable. It’s very simple: when someone gets good service and good products, they tend to go back. Banks will lose the customer relationship as fintechs gain that customer relationship.”
Hall cut in to explain that ‘the future will be more diverse, but I don’t think it’s a question of one or another. Banks need to be clear on what they are going to serve. Choice is going to be phenomenal’.
Meanwhile, Cadbury felt that ‘banks cannot fulfil certain services that fintechs offer. It is slightly to their detriment’.
A member of the audience asked if innovation will bring the death of money licenses.
Parker purported that they are increasingly easier to get: “It is easier to buy it off a manufacturer. That is Tesco’s attitude.”
The aftermath As the debate came to an end and as the results were about to be announced, a member of the audience added that the IT departments throughout large corporations are often the blockers of innovation.
The battle had been fought and the audience had made up their minds. So, who is the clear winner?
Prior to the debate, the voting stood at 84% for the motion in comparison to 16% against the motion.
After the debate, the second poll resulted with only 55% for the motion and a staggering 45% against the motion.
It was decided at the beginning of the debate that the winner would be based on the swing between the number of votes before and after the debate.
On that basis, the opponent of the motion won the debate, with a swing of 29 %.
|For the Motion||Against the Motion|
|George Depastas, head of product, real-time analytics, data products and platforms, Barclays||Simon Cadbury, director of strategy and innovation, Intelligent Environments|
|Depastas heads the real-time analytics product for Barclays Africa, driving the wider innovation agenda and working closely with start-ups, to deliver cutting edge dynamic customer experiences. Depastas comes from an engineering background, and has experience in the areas of digital user experience, business optimisation and innovation strategy.||Cadbury is a product marketer and strategist with 18 years’ experience working for a range of major international brands. Cadbury’s role is to work with Intelligent Environments’ investors to set and deliver the company’s mid- and long-term strategy, as well as overall responsibility for product development and management for Interact, the company’s core product offering. Cadbury joined in 2013 from Lloyds Banking Group where he was responsible for payment technology, and also sat on the credit card division’s leadership team. Prior to this he worked on the launches of a number of firsts in new technology: the Blackberry (BT Cellnet), BT Openzone (BT Retail), 3G Live! (Vodafone Australia) and Sky HD (BSKYB).|
|Sophie Guibaud, vice-president European expansion, Fidor||David Parker, CEO, Polymath Consulting|
|Guibaud started her career in investment banking in New York before joining a growth capital fund in Paris. Along with investing in startups, she advised them on their development strategy. However, wanting to be more involved in startup operations, she moved to London and was instrumental in launching HelloFresh, a Rocket Internet food subscription-based company. After heading product strategy and commercialisation at Bankable, a payment solutions company, she is now in charge of the European roll-out of Fidor.||Parker is founder and CEO of Polymath Consulting, which has now delivered over 50 projects for clients in prepaid cards and emerging payments. The company’s current work includes projects in the Middle East, US, Asia, Africa and Europe. Parker has an in-depth knowledge of payments and payment cards and is known for his work with prepaid cards, mobile money/mobile wallets and M-pos. Parker has previously worked for companies such as the Gaming Bourse, the Pepper Corporation and Saatchi & Saatchi (Saudi Arabia).|
|Jon Hall, MD, Masthaven Bank||Roy Vella, digital expert and consultant|
|Hall will lead Masthaven Bank, which has unveiled plans to become a new UK retail bank with a launch planned for the summer of 2016. Hall joined Masthaven in January 2015 from Saffron Building Society where he had been CFO since August 2004, and subsequently CEO from 2011. Hall was part of the senior management teams with CT capital, a specialist mortgage lender and intermediary, Aviva and PwC, both in the UK and Bermuda.||Vella is a digital entrepreneur and independent consultant to brands such as Visa, Vodafone, GSMA, and small startups. Before offering his expertise at large, Vella served as leader of RBS global mobile banking efforts. Before this, he spent five years at PayPal, starting out as director of business development in USA merchant services before leading the mobile payments initiative across Europe. Prior to PayPal, Vella worked as VP of sales and marketing at 4charity, Inc., then as partner of Quantum Technology Ventures, a corporate VC firm focused on the storage industry.|