By Ted Howard
Fintechs and banks are realizing that by working together they can achieve their goals. Here’s how Deutsche Bank is working with these organizations.
Fintechs dashing into the banking space a few years ago had a simple proposition: disrupt the global bank sector and steal their business. But a few years later, that sprint out of the gate has become a more measured pace as fintechs and banks see each other as allies rather than enemies.
Today, fintechs are partnering with many of the banks they once targeted, seeing where their bigger competitors can help. For their part, some banks see the innovation developed within fintechs as something they cannot match given the current environment.
Deutsche Bank embraced fintechs as clients in the early days and recently analyzed the relationships. This was in part to find ways to produce more creative and competitive solutions for clients. In fintechs, Deutsche Bank, like other banks, sees symbiosis. They recognize that they can foster innovation and at the same time help the upstarts navigate an increasingly difficult regulatory landscape—something banks have been getting good at since the financial crisis.
“Fintechs, and huge digital ecosystems in particular, have entered the market with a bang,” said Arthur Brieske, Head of Trade Finance and Cash Management Corporates, Global Solutions, Americas at Deutsche Bank. However, “in order to maintain their position, they must find a way to meet their regulatory, investment and risk needs in order to focus on their core competencies. They may find partnering with a global banking provider to be the most strategic approach in this regard.”
And the dollars and depth of bigger banks is what fintechs need as regulators turn their attention to the startup financial sector, and fintech innovators already are worried. According to a new survey of 101 fintech founders and investors by Silicon Valley Bank, 43 percent expect regulatory issues to be the biggest obstacle to their success in the coming year. So joining forces will be one way to cut through the regulatory red tape.
Overcoming Hurdles
In the past, banks’ in-house innovation around fintechs reflected a lack of focus. Deutsche Bank points out that this was happening for a variety of reasons; one being the impact of banking regulation. While acknowledging that regulations have greatly improved banks’ ability to weather future crises and usher in the use of technology, at the same time, the regulations can delay banks from investing in innovation.
“The necessary prioritization of compliance means banks must divert investment into obligatory updates to meet new standards for reporting, anti-money laundering, anti-fraud and know-your-customer requirements,” says Seth Brener, Head of Cash Management Corporates, Americas at Deutsche Bank. That means that “ongoing due diligence has increased operational costs, and new capital adequacy rules have demanded higher levels of capital be held on banks’ balance sheets; further diverting cash away from innovation.”
Combine this with a near zero-interest rate environment and investors and clients asking for returns on equity, and you have an atmosphere of compressing margins, ever-increasing business costs and fewer dollars available for innovation. One example of how regulation delays innovation is in the area of data. Currently banks are restricted in how they use customer data; however, fintechs and large digital marketplaces have different restrictions. This gives them a large competitive advantage when it comes to developing more targeted services and offerings.
But bank regs have had an important and positive impact as well, Deutsche Bank says. For instance, process standardization has helped in the creation of the Single Euro Payments Area (SEPA), and pushed forward technology advances, which has invigorated ways in which banks can differentiate themselves from their competitors.
The players
Banks are also seeing how innovation is transforming the retail banking space, and how they are far behind when it comes to clever offerings. For instance, radical changes in payments, digital currencies and money transfers from the likes of PayPal, Stripe, M-Pesa, Alipay, Payoneer and Apple Pay, are turning each of these segments of the industry on their head.
In retail finance, technology and fresh ideas are leading to faster ways for people to move money. Unfortunately, they are also concepts that many corporates are still awaiting. Indeed, many multinational corporations (MNCs) are progressing far too slowly when it comes to streamlining payments, integrating billing, mobile payments, using cryptocurrencies and peer-to-peer and business-to-consumer transfers. They need much more help from their relationship banks to get them to the point where all of these transactions are straight-through.
“Such innovations continue to make payments increasingly cashless and invisible, while enabling data-driven engagement platforms for customers,” Mr. Brieske notes.
Where Treasury Can Fit In
Given the rapid change that fintechs and digital ecosystems are bringing to the banking sector, which has largely been driven by consumers and not regulation or profit, how can they be translated into the business-to-business (B2B) space?
It is the end-state that drives the change; that is, the high expectation that technology will be able solve the issues companies face. Companies want efficiency, with streamlined or straight-through processes; they want it in real-time with up-to-the-second visibility over cash-flows; they want it integrated and flexible, with one-stop portals offering functionalities like seamless reconciliation across different user profiles. They also want services to be intuitive, accessible, in the office and mobile, online and offline, and have the ability to tailor products to a specific company’s needs.
These are all dynamics that consumers already enjoy but are still in many cases in the nascent stages of corporate use. While companies may want the new and innovative products, banks and fintechs could have their work cut out for them. According to the Silicon Valley Bank survey, one major challenge fintechs face in their growth is “reticence by corporations to adopt new technology.” This could be just the result of years of technology’s failure to deliver as promised (evidence of this can be seen in Excel spreadsheets, which still, despite the advances in treasury technology, remain one of the most popular cash management tools). And as Deutsche Bank’s Mr. Brieske notes, corporates “have low risk appetites for fronting fintechs directly and accepting the counterparty risk, instead the majority expect their bank to front the fintech and be the corporate’s contractual partner.”
But with treasurers’ roles expanding, often with fewer resources, change is inevitable. However, they are “no longer willing to accept off-the-shelf products dictated by banks. Instead, they are demanding new systems that are truly fit-for-purpose,” Mr. Brieske says. He notes that Deutsche Bank continues to develop products to meet these demands and in some cases is leading the way in corporate banking innovation.
That Future State
A recent white paper published by Deutsche Bank paints a picture of the treasurer of the future:
“A treasurer or CFO on the street in New York logs onto his banking portal via an app on his mobile device. He has a real-time overview of all his cash positions and can see that a delivery has been accepted and simultaneously paid for in Kenya via an m-POS, with an integrated FX component. His portal analyses global data and alerts him to a potential short-term spike in demand for his product in Asia. It also suggests the best potential means of financing a productivity increase; a proposition he can accept at the touch of a button. His bank, which previously would have had to request years of historical (perhaps unstructured) data, can view his accounting and ERP systems, make an instant credit-risk score and offer him appropriate financing in that moment.”
Mr. Brener says that it is fintechs, now realizing the importance of incorporating traditional banks as partners and allies, who will be best positioned to design and maintain the components that will create this seamless, digitally connected future.
It will be the banks that help them get there, although perhaps in a way that is different than many envisioned. Mr. Brieske believes that fintechs will lead the way in delivering the customer experience, both consumer and corporate, from an end-user perspective, while banks will deliver the overall solution. “Increasing customer demand and growing trust in fintechs may enable non-traditional firms, which excel in creating seamless and intuitive digital customer experiences, to drive innovation in the end-user space,” he says, “while traditional institutions focus on driving innovation of the end-to-end financial solution particularly in the interbank space.”
Therefore, fintechs’ ambitions of slaying the giants have given way to partnerships where each side offers their expertise. And despite all the technology expectations, there remains demand “for advisory and consultation services,” Mr. Brener points out, and these elements are “best provided by an experienced and trusted banking specialist with market insight and a global overview.”
But that doesn’t mean complacency is in order. “Innovation is not simply adapting existing processes or frameworks for app-based use, or use via different channels and devices,” Mr. Brieske says. “It is a more dynamic change, such as the technology-enabled introduction of a new business model. Examples are widely apparent outside the financial sector (consider Uber) and usually include payments. Similar change can be expected—and is being demanded—in the B2B space.”