An investor takes a photograph using his phone in front of a board displaying stock prices at the Australian Securities Exchange (ASX) in Sydney, Australia. (Reuters Photo/Steven Saphore)

Fintechs May Be Corporate Banks' Best Frenemies


OCTOBER 11, 2016

For all the angst over the disruptive impact of financial technology providers, the smart money in corporate banking sees fintechs as strategic allies, not enemies.

Although their service models have attracted considerable attention, fintechs are unlikely to endanger established corporate banks in the near term. Existing players hold sizable structural, economic, and relationship advantages that new entrants will have trouble overcoming.

The greater threat comes from within corporate banking's own ranks — from fast-moving incumbents that blend fintech innovations into their business and operating models. Some corporate banks have already begun to parlay their investment in fintech partnerships, acquisitions and internal incubators into big gains by launching attractive new services, reaching underserved segments and differentiating the client experience — at competitive price points and lower operating costs.

To avoid being left behind, corporate banks need to determine where fintech innovations can deliver the greatest top- and bottom-line impact and develop a cohesive strategy for befriending their fintech foes.

Weighing the fintech threat

Of the approximately $78 billion invested in the fintech market since 2000, more than half has gone to fintechs in the corporate banking sector. Despite their growth and innovation, however, the new entrants face several barriers that offer established players a number of advantages in the near term.

First, incumbent corporate banks enjoy an inexpensive and stable deposit base and greater institutional access to equity and debt markets.

Second, incumbents also enjoy long-standing customer relationships, especially in the mid- and large-cap segments. BCG's benchmark data confirm that corporate banking is very much a people business and will remain so even if clients come to rely more heavily on remote and digital service interactions.

Finthecs lack that base: their offerings tend to be transactional and oriented toward single products. Moreover, banks court long-term relationships with higher-value clients, which deliver greater lifetime returns. To attract these clients and sell larger, more complex services, banks often spend $1,000 or more per prospect, a figure that can be a burden for fintechs on a startup budget.

Fintech solutions are also better suited to offerings that can be easily engineered and standardized for digital channels, whereas banks tend to be stronger at managing the nuances of complex products, such as derivatives and structured credits. Banks also hold a full banking license and have the capacity to keep up with heavy regulatory demands. This can be a struggle for younger, smaller entrants.

A major indirect threat

Although fintechs may not displace corporate banks directly, an indirect threat — posed by the banks themselves — is likely to be more sweeping and profound.

Corporate banks that move swiftly to combine their funding, relationship and sales force strengths with fintechs' customer service and efficiency edge will have an advantage over the rest of the field. Already, several corporate banks have signed up fintech partners to lock in proprietary technologies and gain access to specialized services and talent before the cost of acquiring those businesses climbs.

The fintech capabilities that corporate banking leaders are looking to capitalize on include the following:

Specialized service. Fintechs home in on specific parts of the value chain. In payment processing, for instance, MineralTree offers a cloud-based mobile and online platform for which it develops customized products and processes. Similarly, within supply chain financing, companies such as Taulia, Viewpost and MarketInvoice provide automated electronic invoicing and payments.

Low cost. The ability to digitize and standardize offerings lets fintechs sell products, platforms and services at substantially lower prices than corporate banks do.

Digitally enhanced features. By partnering with fintechs, corporate banks can take advantage of modern, flexible and integrated IT architectures to provide real-time interaction, speedy processing, continuous availability and other attractive customer features.

Ability to reach underserved segments. Offerings from Lending Club, Kabbage, OnDeck and Amazon Lending have grown exponentially by servicing segments that are often shut out of traditional corporate banking channels — such as the small-business subprime category.

Strong data analytics. Corporate banks are sitting on what is arguably the best source of customer data: clients’ core investment or transaction accounts.

Engaging with fintechs for competitive advantage

Corporate banks that don't act swiftly to adopt these fintech capabilities will see profit margins come under increasing pressure. To avoid seeing profitability erode, corporate banking leaders should move swiftly to do the following.

Prioritize innovations with the greatest impact. When developing their engagement strategies, corporate banks should focus on the handful of areas where fintech capabilities will offer the biggest lift in customer retention and satisfaction, new-product offerings, risk assessment or cost efficiency.

Build, partner or acquire. If a bank has the culture and track record to create disruptive capabilities, building offerings can be less expensive than developing them through partnerships or acquisition. However, that approach requires significant management time and technical talent, both of which may be hard to secure.

As an alternative, some banks are establishing internal incubators. One U.S. corporate bank, for instance, relies on a fintech accelerator program to get a jump on promising innovations and gain access to the digital talent needed to turn ideas into customer solutions.

Others are establishing partnerships, such as JPMorgan Chase's recent deal with OnDeck, a leading small-business lending platform. The deal will allow Chase to take advantage of OnDeck's sophisticated credit modeling and could give the bank an underwriting advantage over competitors.

Acquisition is another option. Some corporate banks are creating venture capital funds of more than $100 million to invest in or acquire promising fintechs. Benefits include access to attractive, market-tested technologies and the ability to prevent competitors from using them.

That can be especially powerful if a fintech has distinctive capabilities and offerings that are hard to replicate. Dips in fintech valuations may provide buying opportunities, but as with any acquisition, cultural, technological and other forms of integration can be difficult.

Fast-moving players that develop a thoughtful fintech engagement strategy will be able to lock in strong partnerships, talent and proprietary technologies and deliver superior financial performance. Winning corporate banks will make fintechs their allies, not their enemies.

Ernest Saudjana is a partner and managing director at the Boston Consulting Group.