Payments: developing bank/fintech complementarity, a strategy more relevant than ever
‘Open Banking’ began a few years ago now, and collaboration between banks and the new financial players is starting to bear fruit. This approach is all the more fitting in the current economic and regulatory environment, in the face of changing client needs.
The pace of innovation in recent years dictated by the regulatory and economic environment
Digitalisation of payments has opened the door to many innovations. New technologies, including APIs, have accelerated this digitalisation. At the same time, the entry into force of PSD2 in Europe in 2018 had a strong impact. The European Union's requirements from payment service providers increased considerably. New regulated European players emerged and challenged banks. Boosted by low - or even negative - interest rates and having to meet fewer regulatory requirements than banks, fintechs have rapidly developed innovative and effective solutions, mostly focusing on a delineated section of the value chain in which they have excelled. This is how they were able to disintermediate banks from their clients.
With pressure on profitability, competition from new entrants, and high attrition rates, banks needed to react. They accelerated investment in innovation organisationally (innovation entities reporting to senior management, hiring of "innovation leaders” and "digital" profiles), technologically (development of open banking with payment platforms, and API services), and strategically (launch of internal start-ups, the first partnerships with fintechs). Societe Generale's creation of its internal start-up, Forge, working on crypto assets, reflects these development and innovation policies.
Complementary strengthened by the new environment
Post-pandemic, and in an uncertain and tense geopolitical situation, the market environment has changed, with rising interest rates, ongoing inflation, pressure on liquidity, and a crisis of confidence caused by various business failures. Investors are becoming more demanding in the race for fintech profitability. Refinancing of new players has become more difficult, which has changed the balance of power between banks and fintechs.
The more demanding environment is fostering consolidation and selectivity in players. Only the strongest will remain. With greater capacity for investment and self-funding, banks are better positioned, are innovating more, and their central role is confirmed. They are also able to manage risks and ensure their payment businesses operate securely.
Banks’ role as trusted third parties and providers of social and financial inclusion is clearly highlighted. Assuming equivalent innovative services, banks have the benefit of brand image, trust and security. This is why fintechs are seeking partnerships with banks, to benefit from their recognition and credibility with their clients. In this more restrictive environment, banks and fintechs have every opportunity to further cultivate those areas where each complements the other.
The need for an alliance between the two worlds
As these intermediaries between banks and clients have emerged, banks are now looking for ways to maintain and consolidate direct client contact. To remain a key player in clients’ eyes, the best strategy is to reposition themselves as the arranger of a complete ecosystem, whereby they can deliver the best services, whether they are sourced in-house or externally. Data is becoming an essential asset in serving clients. The more a client uses a bank, the more valuable and sophisticated data is available. This is the entire point of the API approach developed by Societe Generale with SG Markets, for example.
But does it mean the end of fintechs and the return of banks? No, because to support the digital transformation and the internationalisation of their large corporate clients, banks must offer robust, scalable and turnkey solutions. To meet client needs in terms of immediacy of response, security and financial soundness, an alliance between the two worlds is beneficial. Banks can innovate securely, with a larger strikeforce given their huge distribution capacity (i.e. geographical coverage and size of client base) to spread innovation widely. On the other hand, fintechs are more agile, able to deliver new services quickly and with greater boldness in terms of innovation.
Clients, banks and fintechs: everyone wins
Through acquisitions, equity stakes, joint ventures or strategic or commercial partnerships, the alliance strategies that have been followed by banks in the payments arena have now proved entirely appropriate, whether by increasing client satisfaction or generating business opportunities for all parties involved. In this triumvirate of clients, fintechs and banks, everyone wins.
For example, Societe Generale offers its clients innovative payment services by making use of fintechs such as Lemonway (BtoB market place), Kyriba (cash flow management), Fintecture (account to account payments), PayExpert (payment acceptance). Recently, the "Payment & Transaction Banking Accelerator by SG" programme was launched to kick-start some new collaborations. In so doing, the Group is showing its commitment to the startup ecosystem to support the transformation of its transaction banking activities and meet the ever-changing needs of its clients.
Banks and fintechs converge and dovetail in a more restrictive economic and regulatory environment.