This article from MEDICI talks about banks, FinTechs, and Neobanks going from being competitors to being in partnerships. Read about it all only on MEDICI.

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From Competition to Partnerships: Banks, FinTechs, and NeoBanks
July 23, 2019
FINTECH
BANKING
Banks and FinTechs have had a tricky relationship over the years from competing for the same consumers, and at other times, leveraging
each other's strengths. However, in recent times, the mutual acknowledgment of the need for the other has grown and become more
evident.
One of the most innovative and groundbreaking segments in financial services is that of digital-only banking or neobanks. Neobanks
present the financial services ecosystem with an exciting proposition for growth through partnerships. It allows the digital
transformation of banks without the need for large investments or acquisitions, and at the same time, neobanks can gain access to
capital and larger customer bases. Today, neobanks partnering with financial institutions is an increasingly common phenomenon, and
this is only expected to increase.
Trends in funding, investments, and M&A
Heavy reliance on legacy systems and the lack of an innovation culture presented banks with a challenge from FinTechs. They had
solutions that seemed to threaten the very existence of banks with their cutting-edge technology solutions. Their technology made bank
operations seem slow and inefficient. Many assumed that they had the potential to take away the customer base of banks, dealing
damage to them. So, traditional banks began to do one of two things – either collaborate with existing startups or develop the
technology themselves, in-house.
However, the latter wasn't as common. A report by Morgan Stanley found that only about 7% of banks were involved in the
development of in-house technology solutions. The majority of banks, instead, saw more value in either partnering or investing in
FinTech companies.
As a result of this, FinTech startups have attracted high-value deals for several years. MEDICI data shows us that the global FinTech
community raised more than $61.86 billion in a combination of VC/PE investments and acquisitions/buyouts by any player in the first
half of 2018, and this number has only increased since then.
Breaking this down, we find that the FinTech space saw some uptick from 2017 and in 2018, as there were 21 acquisition deals by major
banks and FIs. 2018 witnessed a total acquisition deal value of more than $1.4 billion. In the 21 acquisition deals, 10 banks acquired 13
FinTechs; 2 asset management companies acquired 2 FinTechs; and 5 insurance companies acquired 5 FinTechs.
In contrast, for VC/PE investments, in Q1 2019, FinTechs around the world raised $9.15 billion in investments from 445 deals with 5.78%
YoY growth in total funding raised compared to Q1 2018. From 429 deals, FinTech startups were able to raise $8.65 billion in funding in
Q1 2018. In terms of the number of deals, there was a 4.66% YoY growth in Q1 2019 compared to Q1 2018. Further, it is interesting to
note that the funding for FinTechs in Q1 2019 was spread out across the whole gamut of segments instead of being limited to just
payments or lending.
While the changes in these numbers indicate the scope of the FinTech ecosystem, the numbers are growing at different rates. One thing
is for certain – in-house development seems to have already taken a backseat. With respect to collaboration, it is estimated that
although acquisitions will remain important for bigger FIs and banks, the shift to investments and more importantly, partnerships, will
perhaps start to take precedence.
The evolution of the Bank-FinTech dynamic: towards
collaboration
As we have seen in the previous section, the money game can substantially tell us about the relationship between banks and FinTechs. If
we chalk out collaboration, we roughly see three periods: Phase 1 – acquisitions, Phase 2 – investments, and Phase 3 – partnerships.
Acquisitions

2. An obvious benefit of acquisitions for banks is their ability to get exclusive rights to the technology used by novel startups. This could
give them a competitive edge, access to new markets, and a bigger customer base. Usually, significant capital allocations into strategic
acquisitions are followed by a stage of active learning by the bank – this is when institutional players turn competition into reworking
them into their own operations and leadership.
Take the acquisition of Earthport by Visa early this year, a deal that was worth $321.4 million. Both Visa and Mastercard initially wanted
this deal, but in the end, Visa took the last step. This deal is expected to help the company expand its cross-border network service. It
would enable the already banked population to make payments in a faster manner securely. Let's look at another acquisition – that of
IRIS Software by Intermediate Capital Group for $1.06 billion in 2018. This was the biggest disclosed acquisition of the year and was
expected to benefit the companies, employees, and customers backed by ICG. Interestingly, we see that while acquisitions range from
segments, including payments, lending, and regulations, digital-only banking solutions are also hot buyouts. In 2014, neobank Simple
was acquired by BBVA in a deal worth $117 million.
Investments
Strategic investment into a startup allows for a company to hold a stake in the decisions made. Further, in contrast to acquisitions, it
allows for the startup to remain comparatively independent. This may not follow through in acquisitions, where it may prove challenging
to keep up the innovation culture. Moreover, investments into FinTech startups help traditional banks improve their chances for
partnerships and possibly their own infrastructure for digital transformation.
Take the investment of Goldman Sachs in Elinvar in 2019, a startup in the digital lending space. This investment gives Goldman Sachs a
13.9% stake in the startup. Another potential investment for Visa is via their $100 million investment fund launched in mid-2018 for
European FinTech startups. This fund is expected to support the development of startups innovating in the arena of open banking and
those using emerging technologies that have the potential to create new secure, commerce experiences. Back in 2013, we see that
Bill.com, a payments company, also received initial investment support from Bank of America.
Partnerships
This phase is, perhaps, the most crucial. It links the complementarity of the two players and helps them leverage each other's potential
strengths. On the one hand, as has been the perception, banks are not designed like modern technology companies. Their legacy
processes, red tape, and regulatory compliances come in the way. In contrast, they are usually good with settlement, security, and credit
checks. Furthermore, they have large legacy datasets of customers, which could be used to gain insights on consumer behavior. And
most importantly, banks have trust. Consumers have used them for several decades for any of their financial needs.
On the other hand, FinTech startups are known for their cutting-edge solutions. They have strong technological solutions which leverage
artificial intelligence and machine learning. They have the ability to identify and fill gaps in the current ecosystem. They are known to
address the evolving needs of customers and bring new products into the market. They are groundbreaking in regulatory prowess.
However, they may lack the capital needed and may not have access to large customer bases.
When we combine the best of these two, we are left with an interesting mix. Banks, along with FinTech startups, can change the game by
providing customers with scalable solutions. This can be in lending, through the ability of startups to leverage MI and quickly identify
the creditworthiness of borrowers. Alternatively, it can be in payments where digital wallets and POS make transactions easier for
businesses and consumers. Or, perhaps, in the fast-growing neobanking and open banking space.
According to Deloitte, financial institutions are more likely to collaborate than compete with FinTech. The numbers are staggering. It is
estimated that 82% of incumbent financial service providers expect to increase their FinTech partnerships in the next three to five years.
Let's take a look at some of the partnerships that already exist. Moven, a FinTech startup in the neobanking space, partnered with CBW
Bank in the US. Today, the latter issues cards for Moven, and together they provide real-time insights to their users. Similarly, Open, an
emerging neobanking platform, signed a partnership with ICICI Bank in 2018. This helped ICICI account holders to connect their
accounts with the Open platform. Other partnerships include that of Ingo and Visa, a deal that would eliminate $33 trillion in paper
checks.
The shift to neobanking
As mentioned before, although payments and lending startups made up a chunk of the investments for several years, we have begun to
see a shift. We see the proof of this in the investments made into neobanks and challenger banks. Funding data from March this year
reports that the segment came close behind lending with startups in the neobanking space, raising $586.7 million across five high-value
deals across the globe.
Put simply, neobanks or digital-only banks deliver financial services primarily through the internet or other digital channels instead of
physical branches. They tap into consumer segments that were previously not considered as important. These could be SMEs, migrants,
youth, freelancers, etc. Very often, they may face hurdles to traditional financial institutions due to lack of paperwork or collateral, or
may simply find the process followed by older players cumbersome.
One interesting player that has emerged in the neobanking and digital transformation ecosystem is Open, which is valued at $150
million. Open is regarded as Asia's first neobanking platform for SMEs and startups. It was founded in India in 2017, and since then, it
has grown by leaps and bounds. In a world where businesses would spend hours trying to reconcile all their transactions and be forced
to juggle between multiple tools to manage their finances, Open provides an easy solution. It helps collect payments, do payouts,
reconcile transactions, auto-generate accounting reports, do expense management – all on a single platform. Open also exposes
developer-friendly APIs for SMEs & startups to integrate banking into their business workflows.
Open partners with banks and offers accounts for small businesses. Its customers include SMEs and retail segment traders with $50,000
to $200,000 of annual turnover. Usually, its customers come from Tier 1 & Tier 2 cities in India, such as Mumbai, Kolkata, Hyderabad,
Lucknow, Patna, and Cochin. Currently, it provides businesses with solutions to view, reconcile, and manage all their banking needs on a
single, unified dashboard. This allows them to collect payments, auto-reconcile them, and make seamless payouts. Moreover, Open
offers additional tools, including an integrated payment gateway, automated accounting, and expense management. Interestingly, the
company does not charge the users any subscription fee. The aim of this is to enable more SMEs to join the platform. The company
serves more than 100,000 SMEs and processes $5 billion in transactions annually. In the near future, Open aims to work with micro-
entrepreneurs and startup owners as well.
In October last year, Open announced its partnership with ICICI Bank. This partnership would help businesses to integrate banking
functions into business tools to send invoices, collect & send payments, reconcile, and do expense management from a single platform.
The way forward
It is important to remember the adage – the whole is greater than the sum of its parts. The combination of the strengths of two separate
entities has the potential to create something bigger and better. One sees proof of this in the evolving relationship between FinTechs
and banks. A recent study showed that 91.3% of banks and 75.3% FinTechs were expected to collaborate in the future.
The other trend we notice within this ecosystem is the clear shift towards neobanking. They have managed to tap into segments of the
population that were either previously not adequately served, or whose expectations haven't been met by conventional financial
services. With MAS issuing new licenses and Hong Kong stepping up its game, regulatory bodies have begun to recognize the
importance of this segment. In India as well, we see an increase in startups in this space like Open, NiYO, InstantPay, and InvoiceEra.
One thing is certain about the future: neobanking has the potential to enhance both the quality and reach of financial services that are
currently being provided to consumers. Perhaps the best way ahead is growth through increased partnerships – something that is not
just on the horizon, but that is steadily and surely moving nearer to our present.
MEDICI Team
MEDICI Team is a group of content writers, bloggers, journalists, researchers, and editors from the MEDICI who collaborate to create FinTech insights.

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