There is a large number of technical startups which are becoming a threat for large banks.
Why and how is it possible that relatively small startups can compete with the largest banks of the world?
The rapid development of new technology has changed the way customers behavior. Customers have higher expectations, they are used to faster, cheaper and more convenient services. Compared to other industries (for example the music industry), the services of traditional banks are roughly said outdated. For example, in the Netherlands making a simple payment from one bank (ING) to another bank (Rabobank) will take one day to complete (in the weekends even longer). The startup Sowdan (founded by 2 students from the Erasmus University) saw this as an opportunity and is developing an app which make payments real-time 24/7 possible.
Another startup Bunq is responding to the needs of the customers. This company can be seen as a WhatsApp for payments. It allows people to easily make payments to each other or share a single account as a group. A competitive advantage for Bunq is that is has a formal banking license from DNB (central bank of the Netherlands), which gives Bunq the possibility to give customers their own IBAN, their salary deposits and make payments to other banks. Also, Bunq has another business model in comparison to traditional banks. According to Nikman (the founder of Bunq) “We are not going to make money with money. That really is our ideology. By earning money exclusively from providing services to its customers, there is an extra incentive to concentrate entirely on the quality of those services.” (NRC, 2015). This can be a competitive advantage because of the lack of trust of customers in the traditional banks after the financial crisis of 2008.
The largest digital money transfer network Azimo, has introduced money transferring via Facebook Messenger. There are hundreds of other examples of startups taking over a service from the bank which are more convenience for the customers.
Those startups have the ability to move quickly and developing and launching new innovative products, in contrast to traditional banks which are often weighed down by old and expensive IT systems. But will large traditional banks like the ING and Rabobank vanish? I believe not. Those large banks have the advantage of having decades of experience, know-how of the market and enough capital to invest/acquire these startups.
I believe these fintech startups and banks are becoming each other best friends.
Will large banks still exists in 10 years?
12
September
2016
Thank you for this post Koen!
I agree with you that traditional banks are anything but efficient. I find it difficult to believe that, in the technological era that we are living in, banks are not doing transfers in the weekends. Not only is this very costly, but also inconvenient in many cases. However, I do not believe that traditional banks will be defeated by smaller startups but not for the same reasons as you do. You mention that the large banks have the advantage of having decades of experience, know-how of the market and enough capital to invest/acquire. But for consumers all these reasons are not critical for deciding for which bank they should go for. The biggest advantage of traditional banks over the startups is that consumers just don’t trust the startups with their money in my opinion. Personally, I do not want to risk losing a lot of money knowing that 9 out 10 startups fail.
Hi Koen,
I actually wrote a similar blog post, with a focus shift and without knowing about your post of course. This is the link to my blog post: https://digitalstrategy.rsm.nl//2016/09/29/the-future-of-fintech-collaboration-or-cannibalization/ .
In my blog post, I explain that the two possible options for the future of fintech are collaboration and cannibalization. Tech companies will either embrace technology and work together with startups as well as with established IT companies to provide better solutions. The other option is that banks will continue their market shares to tech companies and a lot of banks will vanish.
The examples you give are of companies that just execute transactions. They do not store the money, they do not have access and use your money. It is crucial to point out this element as fintech start-ups can`t engage in traditional financial operations as they do not have a banking license. As banks are highly regulated and have integrated the needed infrastructure, capital and processes, it would be very difficult for technology companies, especially start-ups, to compete for core services. Yes, some companies do provide opportunities for transferring money or lending money, but they do not have the capacity and ability to provide the full range of products and services as traditional financial institutions. Add the lack of safety of start-ups, as Dirk mentioned, and the lack of know-how.
Because of the mentioned reasons, I believe that tech start-ups have a better chance of survival and profit if they collaborate with banks. They could sell them innovative products and services, without bearing the responsibility of handling money. Alternatively, banks can also acquire some start-ups if the start-ups come up with innovative solutions that banks can implement and use under their own brands. So to sum up, I think you are right – tech start-ups and banks will most probably become “best friends”.
Cheers,
Dessy