Collaboration will serve both sides better than competition.
A report from the World Economic Forum (WEF) argues that financial services companies will collaborate with fintech start-ups rather than being disrupted by them.
The WEF, which organises the annual Davos conference in Switzerland, claims that fintech start-ups will ultimately not be able to fully replace financial institutions due to a lack of scale.
The report identifies four key trends increasing the popularity of fintech competitors, including raised expectations for digital experience, public dislike for banks and a corresponding trust for tech firms. In addition, they cite an explosion of new entrants targeting niche services and using connectivity and automation to do so.
These innovations lead to blurring of sub-sector boundaries and changes in consumer behaviour, according to the report, drawing away customers from the bigger banks.
However, the report argues that these disruptions actually bring new opportunities to banks, including the potential to obtain sophisticated technologies through learning or acquisitions, to modernise inefficient infrastructure and to create new channels.
There are also reasons for the innovators to collaborate with established financial services companies, as it is claimed that new entrants will reach "a natural limit" in using niche offerings to "skim the cream" from financial services. In particular, they will find it easier to scale through collaboration.
"In short, the disruption and evolution of financial services is not a zero sum game," the report says. "Not all innovations introduced by new entrants are existential threats to traditional financial institutions."
"Many are too geared towards a specific niche to be anything of the kind. Furthermore, incumbents realise that new entrants already have strong incentives to innovate and that the benefits of innovations often stretch far beyond the company responsible for them."
The report adds: "Looked at from this perspective, it’s not so surprising that deep-rooted cultural differences between innovators and incumbents are not proving a bar to collaboration.
"Caricatures through which each side may sometimes view the other – reckless innovators who ignore the rules or self-serving bankers with regulators in their pockets – must be put aside.
"When shared in the spirit of cooperation, radically different perspectives can help all parties better understand a complex environment and chart a way forward.
"Such partnerships can offer incumbents many benefits, such as implementing cutting-edge innovations at scale, modernising infrastructure and enhancing digital experiences for customers.
"It’s only natural that new entrants will always unleash a few slingshots at Goliath. But in the future of financial services, many could end up reinforcing his armor and helping to make him less vulnerable."
Topically, Santander and Monitise today announced a joint venture to help fintech start-ups.