The evolution of relations between banks and Fintech

Over the past few years, interested financial services players have been working closely with start-up community representatives in a variety of ways, such as investments, incubators, accelerators, solving complex problems, consortia, regulatory sandboxes, and others. Relationships of startups with institutions: insurance companies with foreigners or banks with fintech, reached a qualitatively new level, moving from competition to excellent friendship, which led to positive consequences and accelerated the spread of innovation. Substantial capital injections into strategic acquisitions are replaced by a stage of active exploration. Institutional players are quickly turning competition into a way to improve their own operational approaches and leadership techniques.

“The relationship between banks and fintech firms gradually moved from competition to cooperation. We believe that in 2018, banks will need a hybrid strategy that combines innovative programs and acquisitions. This will allow them to satisfy their needs, from short-term profits and profitability to long-term rates for certain technologies, ”- extract from MEDICI report on the state of FinTech in 2018.

Spencer Lake , former vice president of international banking and HSBC markets, and now chairman of various technology startups, including Dublin- based Fenergo , American Inforalgo, and British SPICA Technologies , as well as a consultant to many other startups believe that the acquisition of technology companies by banks to automate their business operations is only a matter of time.

At the moment, banks practice small investments in many start-ups, usually those whose services they use for their business. Over time, we may see an increase in investment and a concomitant increase in control over the activities of these companies. Source: MEDICI's report on the state of the global fintech market in 2018. While the first two stages of the relationship are already becoming part of the story, the hybrid strategy is gaining momentum around the world. According to some estimates, about 50% of firms representing the financial services industry from different countries plan to acquire fintech startups over the next few years. Moreover, 8 out of 10 institutions predict





strategic partnerships with direct lending services, money transfer platforms, and many other firms that change the face of the money industry.

“Large financial institutions are increasingly paying attention to the takeover scenario as a way to accelerate innovation in their business. We expect that this will lead to a significant increase in the number of investments, mergers and acquisitions in the fintech sector in the coming years.

With such an emphasis on acquisitions and investments, one should first of all determine the optimal process for executing transactions, as well as ensure that regulatory and reputational risks that may affect the proposed transactions will be taken into account in advance, ”said Haruz Zaman , international legal and acquisitions partner. Simmons & Simmons.

While the stories about innovations and investment units in general are very similar to each other across the industry, apart from them, the introduction of an open banking model should be noted . This event can have the most significant transformative impact on the sphere of financial services and end users.

“Open banking initiatives stimulate the introduction of advanced technologies in the financial sector by encouraging (and sometimes requirements) to provide banks with safe ways to disseminate customer account data. Their main goal is to open access to third-party market participants, mostly fintech players, to obtain customer bank data in order to further provide improved, more customized services, ”said Milos Dunžić , vice president for technological solutions in the field of payment innovations. TD Bank.

In the United States and Europe, the transition to an open banking model is different. In Europe, the emergence of a new generation of banking platforms is due to pressure from regulatory authorities, rather than as a consequence of the strategic transformation of institutions.

European transformations, promoting such parameters as data openness, transparency, security, and quality service, yield today the following important results:

• The sharp growth of new market players: startups working in the field of banking, payment companies, aggregators and other companies
• New business models of cooperation between banks and fintech companies
• Improving recognition of fintech products and support for fintech products and services through the marketplace of banks
• Growth of financial companies as distributors of banks

In general, the face of European banking is beginning to change. Even the traditional banks of the Old World, following the example of newcomers, are beginning to accept the paradigms of new business models. American institutions are also not lagging behind in such strategic transformations.

In the US, some of the largest banks have taken steps toward an open model by launching developer hubs. In February 2016, Visa announced the launch of Visa Developer, a landmark initiative to transform its world's largest retail payment network into an open platform. For the first time in the company’s nearly sixty-year history, software application developers have gained open access to payment technology, products and services of the industry leader.

In March 2016, the bank holding Capital One launchedportal DevExchange is a repository with tools and API for developers, allowing them to use the resources and best practices of a financial institution in the field of creating software to improve their own service.

Later, in November 2016, Citigroup financial conglomerate launched a similar developer hub global API platform that makes open banking possible. As representatives of Citi reported in an official press release , the launch of these APIs marked the evolutionary transition of Citi technologies to an open architecture. This step is aimed at simplifying cooperation and building partnerships with fintech companies and consumer brands around the world, which ultimately should have an impact on improving the quality of services.

Using global API Developer Hub, Citi provided developers with access to eight different API categories, including account management, direct payments, money transfer to institutions, the Citi reward program, investment purchases, and account access authorization.

In May 2017, BBVA launched its open banking program, providing commercial access to eight of its APIs for the first time. According to representatives of the bank, the launch of BBVA API Market was the result of more than a year-long cooperation of the Spanish bank with developers and business representatives to optimize the provision of the Open API service. Simple , a US digital bank acquired by BBVA in 2014, was one of the first companies to access the BBVA API Market.

Wells Fargo and JPMorgan Chase have similar offers . All this testifies to the transition of the whole industry to meet the functional separation of payment networks and banking platforms. And therefore we can safely say that open banking is a new trend, which, albeit with certain differences in the conditions and content of cases, will somehow become the main operating model in European and American markets in the foreseeable future.

“We divide the full range of Visa products and services into individual components and provide developers with access to their underlying payment options. We believe this will take commercial services to a whole new level. The integration of Visa technologies will allow for greater security, scale and convenience of payments. The ability to distribute new developments throughout the international Visa network will make Visa Developer the number one program for any developer, ” Rajat Taneha , executive vice president of technology at Visa, who expects changes across the industry to happen over the next few years , shares his vision. .