Fintechs and Banks Cooperate or Flop

The hyped fintech market is exploding and many financial startups are learning the hard way that attacking established banks doesn't pay off.
Cooperating is the new disrupting.

Of course some financial technology companies tower over banks. Take Paypal, for example, or its Chinese competitor Ant Financial ("Alipay"), which is reportedly now worth $60 billion, or €52.7 billion.

But most new financial technology companies, or fintechs, undertaking a David vs. Goliath fight in the banking world are unlikely to win. Experts have one piece of advice for fintechs: cooperate with their established banking rivals – or go belly up.

Financial startups are attacking banks, offering fast lending, simple payment methods and automatic asset management. But, so far, there has been no indication that they can steal many of the banks' customers or even pose a serious threat.

Partly, that is because it is hard for the newcomers to establish themselves as a brand. Meanwhile, banks have become more attentive and are quick to copy promising ideas. Moreover, complex regulations often hamper fintechs.

There is a lot of hype about fintechs at the moment, and bankruptcies and consolidations are perfectly normal. Jörg Sandrock, managing director of PwC-Strategy&

According to a study by consulting firm Accenture, which Handelsblatt has obtained, investments in fintechs that emphasize cooperation increased by 138 percent worldwide last year. In contrast, the fintechs that focus on attack and revolution saw only a 25 percent increase in investments.

Cooperating fintechs often work to improve the processes or products and services of banks, such as account changing services like Finreach and Fino, or identification solutions like IDnow and webID. In contrast, adversarial fintechs attack the existing banking business. They include automated investment managers like Vaamo and Scalable Capital, or credit marketplaces like Lendico and Funding Circle.

Accenture counted all forms of financing, from equity and debt capital to mixed forms. Markets differed greatly: In New York, cooperating fintechs formed the majority, at 83 percent. In Great Britain, on the other hand, more than 90 percent of investments went to attackers, while in Germany the share of cooperating fintechs has declined from 67 to 38 percent.

"With a volume of $768 million and 12 paid counted investments, the German market is still relatively small," explained Friederike Stradtmann, a consultant with Accenture Strategy and expert on digital business models in the banking sector. "Nevertheless, we see a tendency for the share of cooperative fintechs to grow as the fintech markets mature."

Ms. Stradtmann also has an explanation for the British numbers. "Regulation in Great Britain sets lower barriers to entry, which improves the prospects for attackers." Germany's Federal Financial Supervisory Authority (BaFin) is more skeptical about the startups.

That was a fact which soon became clear to Paymill, a company which processes online payments for small and mid-sized companies and in which the Handelsblatt publishing group also holds a stake.

"We applied for a payment service provider license," said founder Mark Henkel. "It would have enabled us to grow faster."

But Paymill's intensive efforts were unsuccessful for two years, and a planned takeover by a bank fell apart at the last minute. "Now we have filed a preliminary petition for bankruptcy, and I'm sure that we will find a new partner," said Mr. Henkel.

Payment transactions are an especially difficult field for fintechs in Germany, because many customers are satisfied with conventional modes of payment, using cash or a credit or debit card, or online via direct debit or transfer.

If banks combine the technology of fintechs with their strong brand, they will be invincible. Achim Feige,, brand consultant

They are not about to change their habits unless fintechs can convince them of new benefits. This tricky reality has already led to several failures. According to Barkow Consulting's Fintech Money Map, 16 German financial startups canceled their services last year. Ten were in the payment transactions business.

"There is a lot of hype about fintechs at the moment, and bankruptcies and consolidations are perfectly normal," said Jörg Sandrock, managing director of PwC-Strategy&. "Maybe about 10 percent of the fintechs active today will still be around in five years. Of those, 95 percent will be owned by banks or will offer solutions for banks. The rest will be independent."

Partnerships are a sensible strategy for fintechs and banks, because they can benefit both sides. "Banks contribute their many years of experience, their large customer base and their knowledge on regulatory issues," said the consultant Ms. Stradtmann. "Fintechs have agile management and develop their products in proximity to customers."

One good example of a David-and-Goliath partnership is Deutsche Bank which uses the Figo interface technology to allow customers to access accounts with other banks through the Deutsche Bank website.

Meanwhile, Fincite is being used to expand Deutsche Bank's automated investment management service, and Deposit Solutions displays overnight money offers from other banks on the Deutsche Bank website.

Commerzbank is also investing in a large number of fintechs and has partnerships with several of them. But the bank is also developing its own lending platform for SME companies, called Main Funders. Achim Feige, a brand consultant with Brandtrust, views this as "a declaration of war against those fintechs that are going on the attack."

Banks are trying to nip competition in the bud and, if necessary, are even willing to attack their own core business in the process.

And the fact remains that banks have a firm reputation among customers, despite the scandals: "Banks still enjoy considerable trust and embody competence," said Mr. Feige.

This is what startups lack, he explained. And those that are unable to establish their own brand don't stand a chance as attackers, he added. The future of banks, however, could be rosy. "If banks combine the technology of fintechs with their strong brand, they will be invincible," said Mr. Feige.


Katharina Schneider is an editor in the finance section of Handelsblatt, covering tax changes, consumer rights and private investment. To contact the author: [email protected]