The uncertain relationship between fintech start-ups and banks

By Madhvi Mavadiya | 6 July 2015

With financial start-ups thriving recently, it poses the question of whether these up-and-coming businesses need support from established banking groups because of their burgeoning success and due to the general speculation that they are invading this traditional sector.

However, the report released by Silicon Valley Bank earlier this year, highlighted that fintech is worth £20 billion in revenue to the UK economy today and has encouraged banks to enter the start-up world, according to the Guardian. Examples include the launch of a fintech incubator by Barclays, Visa Europe’s accelerator called Collab and Santander has set up a fund in order to invest in fintech. It was also announced late last week that Santander are partnering with mobile money group Monitise to invest in fintech start-ups and have committed up to £10 million of capital over the next two years, as reported in the Financial Times.

CEO of recurring online payments system GoCardless, Hiroki Takeuchi, is aware of the disruption that fintech start-ups cause as he has worked directly with Europe’s biggest banks. He explains that innovation is something that banks do not fully understand and fintech start-ups are free to create new systems and products, without traditional financial institutions being viable competitors to their work. “Good intentions are not enough, banks need to change their ability to take new innovation to market if they want to see a return on their investments in the fintech community,” Hiroki said as quoted in the Guardian.

Contrary to Hiroki’s attitude, it was reported last month that UK regulators granted a banking license to Atom to create a branch free and paper free institution. This online only bank requires customers to manage their finances on mobile phones and tablets, and more recently, the company made a deal with a high street lender to provide a digital cheque deposit service. When the bank was launched last year, founder of Atom, Anthony Thompson, said that they intended to offer everything that you would expect from a traditional bank, but would focus on customer service and satisfaction, according to The Mail on Sunday.

Reuters reported last week that those born after 1980 have abandoned bank branches and the younger generation are favouring mobile banking and crowd funding platforms. However, according to the Guardian, Rhydian Lewis, CEO and founder of peer-to-peer lender RateSetter, says that banks have ulterior motives when working with start-ups and that there is no need for support from banking led incubators or accelerators. Lewis believes banks only work with start-ups so that they have easier access to newer technologies, therefore there would be no need for financial institutions to spend vast amounts of money to develop systems independently.

Alongside having to invest in new systems, banks deal with compliance costs and regulations prevent them from aiming for the most profitable markets. Fintech companies can surpass these fees and make more money in a shorter space of time, as Reuters reported.

Some fintech start-ups have been created with the sole intention of competing with banks, such as Ratesetter and TransferWise, according to Guardian. Kristo Käärmann, co-founder of Transferwise says that banks are responsible for their own failure because they do not allow for innovation. “The banks are their own worst enemy; their culture, thought models, incentive schemes limit their ability to innovate which is where an accelerator could help them,” Käärmann said.

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