It’s recently been fashionable to predict a revolution in the world of banking. Fintech evangelists hark back to Bill Gates' 20-year-old quip that "banks are dinosaurs" and proclaim that the asteroid strike that will wipe them out is now imminent.
Just as industries from retail, to entertainment, to transportation have been shook up by software-driven disruption, the prediction is that the banking industry will be the next domino to fall in the uberization of everything.
But so far, the reality hasn’t lived up to the hype. Despite the proliferation of challenger banks in the UK (40 launched since 2010), some high profile members of that cohort are now having funding and regulatory issues before they are even out of the gate.
Alan McIntyre is part of the GlobalScot network, a worldwide group of business contacts who are experts in their field, and driven to help Scottish companies develop, expand and thrive in a competitive international market.
Disruption of the banking industry hasn’t turned out to be a dramatic big bang, instead the erosion of bank profitability by low interest rates and increased regulatory costs has triggered an industry-level response in which banks are using technology to improve efficiency and the customer experience. Instead of going extinct, the dinosaurs have been evolving.
Despite the hype, many fintechs have found that an elegant user interface on top of a traditional product is not enough to pry customers loose from long-standing bank relationships. The digital mortgage origination platforms that promise agreement in principle on your phone are great; that is until you reach the screen where it asks you to put a bunch of paper in an envelope or go into a branch to get the final loan approved. There are exceptions. London-based TransferWise, which allows consumers to transfer money internationally at a fraction of the traditional cost, is actually disruptive, because it lowers fees by smart trade matching between buyers and sellers. In doing so, it marries a nice customer interface with an innovation that actually changes the economics of the business.
But TransferWise is an exception and most fintechs have struggled to create sustained competitive differentiation. This doesn’t mean that banks can be complacent. The asteroid strike on the banking industry is still possible, but is far more likely to come from existing tech giants than small startups.
Amazon is now lending a billion dollars a year to merchants on its platform, a drop in the ocean for the largest commercial banks, but a statement of intent. The comfort that has come from bankers saying that someone like Amazon won’t want the hassle of having a regulated balance sheet was probably mirrored in the board rooms of retailers who thought that Amazon wouldn’t want the hassle of managing 400 physical Wholefood stores.
Enabling banking evolution in Scotland
While they are unlikely to truly disrupt the banking industry, smaller fintechs still have a lot to offer. Some of the most successful Scottish fintechs are those that have focused on enabling the evolution of the incumbent banks in a B2B model.
Encompass, which started in Australia, but is now adding staff in Glasgow, solves a particularly complex and troublesome part of the “Know Your Customer” process; Who actually owns the entity that you are starting a relationship with? Being able to access that information quickly and easily doesn’t revolutionize banking, but it does lower both costs and risks.
Encompass in Scotland
Another good example of cooperation is Edinburgh based FreeAgent (simple accounting and business management software for small businesses), which recently announced a strategic partnership with RBS that includes data integration.
If Scotland is to be successful in establishing a thriving fintech cluster, then a focus on collaboration means there needs to be excellent connective tissue between the upstarts and the incumbents so that they can learn from each other. Simply putting the pony-tailed developers in a room with the suits can still be a challenging cultural match, so there is a role to be played by accelerators and incubators that help startups make the right connections and pitch their ideas in a way that can be easily consumed by traditional banks. Many traditional banks run these types of programs already, but the challenge for Scotland is to make sure that there is enough bottom up entrepreneurship to make it worthwhile running a program north of the border as well as in Shoreditch.
Creating a collaborative fintech ecosystem in Scotland
Creating a collaborative ecosystem between established players and fintechs also means both sides understanding what it takes to have a good partnership. A critical foundation is transparency. Banks need to set clear rules about deadlines, scope and metrics for projects to help fintechs work more successfully with banks on proof-of-concepts. Banks also need to make it easier to move at the speed of technology. Procedures around contract closings and security approvals need to take days or even hours, not months, to keep partnerships on track.
But sometime delays are inevitable, and to ensure fintechs have full understanding of each step, banks should dedicate staffers at the outset to see a project through to completion, providing continuity and institutional knowledge. Finally, banks should create "sandboxes" for fintechs to work in — safe spaces where they can test new products with small groups of actual users in a simulated environment to vet and shape those ideas before having to consider complex regulations and production scale complexity.
The other factor that helps fintechs mature is also the existence of peer networks. One of the reasons Silicon Valley is such an innovation machine is that it has a critical mass of investors, coaches, mentors and Board members who network across startups and help them mature as a group, rather than leave them to reinvent the wheel. Scotland has the challenge of achieving critical mass in a way that creates this virtuous cycle, but again this is where big banks can play a role in combination with universities, government agencies and early stage investors.
Ultimately, the banking industry will evolve and change and fintechs will play an important role in that process. For Scotland to build a successful fintech cluster it needs to create an environment where collaboration with established players is easy and encouraged. If the focus is on creating challengers rather than collaborators, then the probability of success will plummet, and the critical mass required to build a successful fintech cluster will never develop.