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Winter is coming: this is how fintechs will survive

Partnering with banks is going to only get harder, despite F.I.s’ growing need for what fintech companies can offer.

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Startups and small companies in the fintech space could be in for a rough 2019.

It’s not clear that the world economy is headed for a recession: for every negative indicator or market jitter, there are positive stories too, such as amazingly strong employment in the U.S. But one fact cannot be ignored: interest rates on six-month Treasury bills are now 2.41%, versus only 1.26% this time last year.

Money ain’t free no more. How many tech businesses and investment cases are predicated on free money?

The slow rate of adoption for fintech companies makes this shift risky. Digital transformation is hard. Banks and insurers are always slow to work with. Blockchain projects, in particular, remain slow out of the gates. How many fintechs can endure if the global economy turns adverse?

Open banking
The good news is that financial institutions are investing more in technology, with a $50 billion budget for 2019, up by 43% from 2018, predicts Fred Giron, Singapore-based research director at Forrester Research. He spoke at a Finovate event, part of Hong Kong Fintech Week.

Some of this is for internal build, but fintech companies remain essential for banks when it comes to customer experience, experimenting with tech, and speed to market. Open banking makes fintechs even more important as partners.

Faster payments enables everything

- David Bannister, Ovum

If there’s a financial crisis, it’s those F.I.s with the most robust digital offering that will emerge in the best shape, thanks to efficiency gains and a better customer touch.

Banks are focusing more on open banking, especially for corporate clients, says David Bannister, London-based principal analyst at Ovum (also speaking at Finovate). This is partly because banks are now comfortable with APIs. It’s also because corporates are mostly unhappy with their service and are available for wooing if someone can provide them with a better digital experience.

Bannister says real-time payments are the biggest game-changer now: “It enables everything.”

Banks have been slow to roll out payments in line with the faster-payments infrastructure being mandated by governments. Such payments are a risk to banks: it opens the door to competitors (think Alipay). But faster payments also gives the banks a chance to end their reliance on credit-card networks.

B2V2B
Fintechs have struggled to take banks head-on. Leading challenger or neo banks in Europe have taken a decade just to reach their first million customers. They have learned that brand counts. But in the U.S., Finn by Chase and Marcus by Goldman Sachs have done well – partly because they’re branded as an extension of a traditional name, says Dan Latimore, Boston-based chief research officer at Celent.

Yes, fintechs will remain relevant to banks; banks need these partnerships. They are spending more on tech even as many begin to shutter their innovation labs: the word has gotten out that too many such projects fail to deliver returns on investment, and with cash no longer free and turbulence ahead, banks will continue to shutter labs that are no more than marketing ploys. So, banks still need fintech partners but the RoI hurdles are only going to rise.

Given the struggles for fintech companies, are banks the best partner? The fintech industry isn’t about to revert to its early bad-boy disrupter ways: B2B remains the only future for most of these businesses. But banks, never easy to navigate, are probably going to become even tougher to deal with.

The classic tech vendor community is set to become the new hub. DigFin has documented how companies like Finastra and Avaloq are transforming themselves from product-sellers to platforms. They hope to attract hundreds or thousands of fintechs, offer open-source development tools, and serve as a conduit to their traditional banking clients.

Latimore says these vendors have what fintechs lack: brand and customers (they are already approved by banks’ procurement processes).

So as winter approaches, more fintechs are going to pivot from B2B to B2V2B, with a classic vendor in the middle.

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Winter is coming: this is how fintechs will survive