Creative collaboration or all-out revolution? How fintech is growing forward

Between 2010 and 2015, worldwide investment in financial technology ventures rose from USD $1.8 billion to USD $22.3 billion.  As fintech investments continue to rise, so too does the digital revolution in financial services. Competition is increasing between new and established financial brands, as loyalty wanes amongst millennials. While it is unclear whether fintech presents more of a challenge or an opportunity for established financial institutions, incumbents are now taking bold steps to engage innovators and grow in new directions.

In the words of J.P. Morgan CEO Jamie Dimon, “There is stuff we don’t want to do or can’t do, but now more than ever there is somebody else who can do it—and probably well. In order to take advantage of that, there has to be collaboration on both sides.”  Legacy banking and financial organizations are drawn to fintech startups for their innovation-driven cultures, capabilities, flexibility, and singular business focus. For fintech startups, the allure of traditional banks and the like includes deep pockets, a large customer base, and a developed sales team. As opportunities and disruption continue to rise, different models for collaboration have emerged, ranging from mutually beneficial partnerships to cooperative competition.

White label relationships

For some, collaboration occurs behind the scenes. J.P. Morgan recently engaged in a creative white label partnership with non-bank small business lender, OnDeck Capital. J.P. Morgan takes advantage of OnDeck’s technology to quickly approve small business loans—now they can process applications in hours instead of weeks. Meanwhile, OnDeck, which is invisible to J.P. Morgan customers, receives origination and servicing fees on every loan. This is a textbook partnership that adds value for both parties—J.P. Morgan expands its share with business clients who want smaller loans, while OnDeck stands to benefit from a huge revenue boost.

Allies for growth

Cases in which both sides are able to negotiate a deal that becomes a mutually beneficial alliance can often lead to deeper learnings for the industry. In May, UBS Wealth Management America (WMA) announced a partnership with the independent San Francisco-based tech company SigFig, which has developed digital tools that will give UBS WMA’s 7,000 financial advisors the ability to offer advice on assets held at not only UBS, but other institutions—a key capability that UBS WMA had been lacking for competitive reasons. In turn, UBS WMA has made an equity investment in SigFig and will launch a joint Advisor Technology Research and Innovation Lab, where both companies will continually collaborate on developing new wealth management technology. Creative collaborations such as this are what make the future of the financial industry as a whole so exciting.

Acquiring minds

Aside from mutual partnerships, the route many banks have taken is to simply acquire emerging fintech startups in order to foster innovation in-house—and perhaps curb potential competitors. This year, BlackRock acquired FutureAdvisor, Invesco acquired JemStep, and Legg Mason acquired Financial Guard. In each of these deals, the larger organization was looking to enhance its digital advising capabilities, and both parties agreed that an outright acquisition made the most sense for them and their respective stakeholders. These buyouts represent a move by big banks to adopt emerging technologies, and the challenge going forward will be successfully integrating these into their businesses.

Cross-industry collaboration

Interesting partnerships in this space aren’t just taking place between banks—other institutions are working together to shape the future of financial sector. Thomson Reuters and Imperial College London recently partnered to address big data challenges impacting financial and legal professionals. According to Mark Rodrigues, Global Managing Director for Thomson Reuters, the partnership is “part of a growing global strategy to drive faster innovation in fintech and regtech that helps our customers respond to change and opportunity across the financial and legal services industries.” The aim is to create a global ecosystem where academics, financial institutions, and tech firms can collaborate to tackle issues such as supply chain risk, financial risk management, real-time data analysis, and the impact of regulation, thus accelerating evolution—and revolution—in the sector.

Rising co-opetition

It’s a struggle between the future and the past that’s igniting revolution in this sector. While technology has the ability to help financial institutions become increasingly relevant to customers, it’s also a major source of disruption, threatening to shrink the role and importance of the world’s biggest banks.

To avoid becoming relics, big banks are waking themselves out of complacency—embracing openness and collaboration, but also girding themselves against competition. Some of America’s biggest banks, including Chase, Citi, and Bank of America, have banded together behind Zelle, a new peer-to-peer payments network that competes with the likes of Venmo. While a few of these banks have already introduced their own P2P payments services (e.g., Chase QuickPay and BofA’s Mobile Pay), the power in numbers may give Zelle an edge over popular P2P players.

Financial institutions are also in a race to figure out the best ways to adopt and deploy technologies that will essentially change the way they work. As consumer behaviors evolve, financial institutions have to figure out how to phase in new digital platforms more quickly. In addition to its OnDeck partnership, J.P. Morgan Chase has formed a strategic relationship with InvestCloud to expedite the launch of new online investing capabilities, and build stronger digital relationships.

Blockchain technology (which powers Bitcoin) is also on the verge of major breakthrough. While financial institutions have been dabbling, most are afraid of getting “blindsided” by rushing in, according to MasterCard’s Chief Innovation Officer Gary Lyons.

More agile startups are the ones pushing the blockchain technology into the mainstream. San Francisco-based Chain just released an open source version of its blockchain solution, while “innovation firm” R3 CEV, which has formed a consortium 70 worldwide financial institutions, facilitated the first international blockchain transaction in October between members Wells Fargo and Commonwealth Bank of Australia. Financial institutions looking towards the future will have to navigate relationships with startups, and one another, to keep on top of this potentially game-changing technology.

With revolution comes new opportunity, but the path to growth is not clear. Fintech startups and established institutions are exploring new models of partnership, cooperation, and creative competition to shape the future of the finance sector—and beyond.

Strategy Consultant
Senior Director of Strategy