The relationship between big banks and financial technology startups has evolved in recent years. First the banks were standoffish to fintech, looking at the industry as a lightweight in a heavyweight ring they’ve dominated for decades. Then the banks started to see fintech as a threat, as the number of users of their online platforms grew. Today banks and fintechs are striking partnerships and/or investment deals to build fintech solutions together.
The relationship continues to mature, but how cozy the two sides will become remains unclear, say some fintech startups. It depends on how they work together, and consumers, over the longer term.
“I think the relationship will be more like frenemies. We need each other,” Chantel Chapman, a financial fitness coach at Vancouver-based fintech Mogo told a crowd at the VanFUNDING 2016 conference in Vancouver on Tuesday, put on by the National Crowdfunding Association of Canada.
“There’s a lot of talk about banks being disrupted, but disruption doesn’t mean destruction. There are just going to serve a different purpose,” she added.
Chapman points to companies like hers and Koho, which offer a no-fee alternative to a traditional bank account, which sit on top of the regulated deposit-taking institutions.
“The fintech company benefits because they don’t have to handle the regulation side of things for those deposits,” she says, “but the bank or the credit union still gets to do what they want to do, which is collect the deposit so they can lend out money and make more money.”
“It’s a win-win situation,” Chapman says, pointing to examples like Apple, which works with telecom companies to offer its iPhone products.
The problem banks have is that they still lag when it comes to offering cheaper services to consumers, says Casto Pastoll, CEO and cofounder of peer-to-peer player Lending Loop.
“The one thing, unfortunately, they’re still missing out on, unfortunately, is delivering some kind of cost efficiency to the consumer,” Pastoll says. “They’re still missing the point about making it better for the consumer.”
Until banks “get their heads around how the industry is going to change as a whole,” he says companies like his are wary of striking partnerships.
Trust is also an issue, especially among Millennials who studies have shown are wary of big banks.
Chapman says fintechs have an opportunity to come in “with a clean reputation” and ability to speak to Millennials in a way that can reinforce trust. That includes building a social contract with customers by offering a product or service in return for taking and using their data. At Mogo, in exchange for data, Chapman says they offer a free credit-score monitoring product for users that open an account. They see it as offering consumers, which provides customers with education on their finances.
“It’s a focus on what are you giving of value to the customer,” Chapman says.
Daniel Eberhard, cofounder and CEO of Koho, says consumers trust banks to hold their money, but where the trust often ends is when they sell them products they don’t need or understand.
“There is this trust of ‘yes you are going to hold my money, but do I trust you back to have my best interest at heart and to communicate openly and honestly.’”
This is where have an opportunity to lure consumers, and where banks will need to catch up.
That said, fintechs are resting on their early-stage laurels.
“The tipping for Canada hasn’t even begun,” says Tabitha Creighton, who is CEO of InvestNextDoor, a Crowdlending marketplace for small business.
“On the topic of where banks and fintechs play, it will be interesting to see how the banks do being part of fintech, as opposed to seeing themselves outside of that engagement.”
She notes that banks often plan five-to-10 years in advance.
“Be sure that whatever we’re doing, they are already trying to figure out where that lead them.”