The graph above represents the implications derived from the Bank of England 2017 stress test performed on major UK banks: HSBC, Barclays, Lloyds, RBS, Santander UK, Standard Chartered and Nationwide. For the first time, this stress test included “exploratory” scenario where banks are facing a seven-year downturn and competition from financial technology – or FinTech firms.
Apparently, they might be just resting on their laurels without acknowledging their competitors.
But FinTech has demonstrated its power and potential of banking disruption. Consider Nicolay Stronsky, CEO of Revolut who took his startup valuation from $350M to a $1.7bn valuation in just 6 months. It is probably the most aggressive bank challenger in the UK who strives to be ahead of the innovation and attracts millions of customers.
So why is the customer base of this startup increasing at such a rapid pace?
“‘I’ve never seen a big bank do something cool – if they did, we wouldn’t exist’ – Nicolay Stronsky
During Nicolay Stronsky interview with CNBC, he stated that banks mainly have a lot of bankers, but they don’t have real attentive engineers and designers, therefore they are not able to produce what Revolut had built. Although banks could hire people who would imitate Revolut products, that would be too long and complex process which would allow FinTech giants to step up even further, making banks unable to catch up.
However, banks are not making huge changes in their recruitment strategy so far. Instead, a different strategy was undertaken to ramp up current services banks provide.
Acquisitions of FinTech startups appeared to be one of the most preferable strategies to increase the competence of the current financial services offered. Although these M&A deals are prone to huge misstatements in valuation and difficulties combining different teams, banks are not giving up on this investment strategy.
Advancing the payment platform
A multinational Spanish banking group BBVA has been the most active acquirer of FinTech startups in the last two years. Unfortunately, acquiring a bank challenger Simple for $117 million followed $90 million in goodwill impairment charges. BBVA acknowledges that FinTech and Banks M&A deals are hard to comprehend and missed shots or failures occur as a consequence. Therefore, BBVA took another chance of M&A deal with Mexican OpenPay startup aiming to strengthen the functionalities of a payment platform in the bank and integrate new anti-fraud models. For OpenPay co-founder Roberto Bargagli, “This acquisition shows BBVA’s commitment to digital transformation and it is an example of how FinTech firms and banks are going to revolutionize the global ecosystem together. We will work with tremendous enthusiasm to take advantage of this huge potential.”
A similar approach was taken by JPMorgan Chase & Co, as payments drive significant value to its core franchise, retail and operating deposits.
‘We’re living in the golden age of payments’ Matt Kane, CEO of Chase Merchant Services.
According to the JP Morgan 2017 annual report, this financial institution is #1 in total U.S. credit and debit payments volume. How enormous is the flow of electronically processed payments and trades every day? $5 trillion! By being the leader in the payments volume, JP Morgan advanced its payments platform by launching a Chase Pay app. This app generates a secure, scannable QR code with the touch of a button, allowing a customer to pay in the second time. Basically, this app is a perfect replacement for a physical wallet and offers time-saving benefits to its users: ordering favorite restaurant food in advance, automatically adding up eligible discounts and offers and many other life hacks. But that might be not the most tempting features to try this app. Various reward schemes are introduced to consumers, making this is a must-have for anyone in lower income brackets.
Finally, focusing on the consumer who is struggling with personal finances.
“Consumers want a better way to manage their finances,” said Stephen Scherr, Chief Executive Officer of Goldman Sachs Bank.
“We are eager to find experienced teams of talented people who have proven themselves to be consumer-centric in their approach to consumer financial services,” – Omer Ismail, a chief commercial officer of the Goldman Sachs banking division Marcus. By focusing on the American consumer, who struggles with personal finances management, Goldman Sachs decided to buy Clarity Money startup. This money management app provides a broad picture of personal finances by aggregating users’ current accounts and credit card accounts and finds solutions to improve current money management. From the user’s perspective, one app is able to solve current financial issues by showing suggestions which loans could be refinanced, what subscriptions could be canceled or showing available cheaper deals of services they use. Therefore, Goldman Sachs recognize how consumer-centric attitude helps FinTech firms attract an enormous amount of customers in a short period of time.
Maybe Nicolay Strosnky was wrong on his assumption that banks are unable to produce equally successful products as Revolut?