Common Ground Trumps Disruption in Bank-Fintech Linkups

Any lingering doubts that banks and fintech startups can get along should be put to rest going into 2016.

There is the recent announcement that JPMorgan Chase has struck a deal with OnDeck Capital to build an online platform that would reduce the approval time for small-business loans to minutes. And if the vibe at last month's Web Summit, the largest global gathering of startups, is any indication, more bank-fintech partnerships are on the way.

The animus and distrust that's characterized so much of the bank-tech dynamic has faded, said speakers at the conference in Dublin. The two camps have instead moved on to forge agreements. Although some tensions remain, the reappraisal seems to have marked an end to what might be called the my-ascension-means-your-demise phase of bank-fintech relations.

"It's not the institution versus the startup anymore; it's how to partner," said JP Rangaswami, chief data officer at Deutsche Bank. "There will always be people smarter than you. You have to learn how to engage: None of us can scale without partnering."

This environment where presumed competitors have become partners was nurtured from discussions held over the last year and a half, with the two sides finding particular common ground when linking up to target evergreen growth areas, like the small business segment.

"There's been a tremendous acceleration of activity between banks and the alternative finance industry over the last 18 months, whereas before there was incredible skepticism," said Rob Frohwein, co-founder and CEO of Kabbage, headquartered in Atlanta.

Kabbage has loaned more than $1 billion to small businesses with revenues between $50,000 and $2 million a year since its founding in 2009. The firm makes loan decisions in minutes using machine learning — or data-driven computer models — to analyze information from companies' QuickBooks, Facebook, Twitter and bank accounts, to predict repayment likelihoods.

Grupo Santander, ING and Scotiabank, which invested in Kabbage's $135 million round of funding in October, plan to offer the startup's branded small business loans in select regional markets in pilots beginning in 2016: ING will offer the service first in Spain, and if successful, across continental Europe; Santander will do so in the U.K. and Latin America; and Scotiabank will offer Kabbage loans in Canada.

Scotiabank's participation is notable, because it represents a large, fairly conservative North American bank that's teamed up with a marketplace lender to generate business in an underserved niche.

Group head of Canadian banking, James O'Sullivan, when asked about the deal on the bank's fourth quarter earnings call, said it showed Scotiabank was "selectively open-minded to making investments in fintech opportunities, with a view to engaging and partnering, so that we can improve our customer experience."

Kabbage's role in these deals, Frohwein said, is to help banks safely grow new lending business: "Joining forces allows the banks to serve a much broader segment of businesses than they would naturally serve."

Tapping such innovative products, however, has required banks to lower their competitive defenses.

"I'm much more interested in how Kabbage chooses to contract with the banks," Rangaswami said. "Because so much of the friction is in the contracting, and part of partnering is taking out the frictions of transaction costs within that process. Institutions like us, we have to learn how to partner better by lowering these frictions."

Deutsche Bank has enlisted Microsoft, HCL and IBM to help it assess over 500 startup tech solutions each year at the bank's innovation labs in Berlin, London and Silicon Valley. The move comes as part of Deutsche's five-year, $1.1 billion digital overhaul.

Fintech upstarts, meanwhile, have had to curb their own aggressions, if not their ambitions, after realizing that the easiest way to add users and monetize their innovations is through helping banks better service customers.

"For us, the issue is not replacing banks," said Mike Laven, CEO of Currency Cloud. The London-based firm enables small institutions, which otherwise lack a foreign exchange capability, to provide discounted electronic cross-border business-to-business payments to online shops and other businesses.

"A lot of banks are happy to work with us because effectively I'm wholesaling and making it easier for businesses to access their services," Laven said.

Tensions remain in finding that middle ground, however. While discounted pricing may be an easy sell to newer institutions seeking to boost their foreign exchange businesses, like Currency Cloud clients Mediterranean Bank, headquartered in Malta, and branchless, Munich-based Fidor Bank; it's less attractive to banks that have longer histories of making revenues selling FX services.

"And to make a price change is a policy decision that a bank can do overnight," Laven points out. "So selling what we sell based on price is actually a race to the bottom. We will need to continue to work with the banking infrastructure: It's going to be there."

As to what the bank of the future will look like, banks and startups' visions can still diverge.

"The thing about fintech right now is our mindshare way overwhelms our market share," Laven said. "Ultimately, we look at the banking system as a system of rails or as a utility: There's going to be a repository of money, maybe identity, a whole series of things of value held by banks, while firms like ours will be doing interfaces to the customers."

Banks don't necessarily disagree. Some see blockchain technology as providing the rails on which transactions will ride between banks in a decentralized, but secure "walled garden," with the banks acting as trusted gatekeepers.

"I think money will be cryptographic," said Julio Faura, head of innovation and research and development at Santander. "But banks will be providing advisory services and credit, putting price to risk, whether lenders are centralized or decentralized. And the very nature of money will become digital, track-able and smart."

And as the Internet of Things imbues everyday objects like refrigerators and cars with the electronic ordering capabilities of today's smartphones: "Payments become just a small part of a much wider user experience," said Jonathan Vaux, executive director of digital payments and strategy at Visa Europe. "That's tough for the financial community, which is used to controlling the value chain end-to-end."

That's why Santander, which has become well known for investing and partnering with "disruptive" startups, envisions a "FinTech of Things," where one could get a mortgage or check a bank balance from a car that drives itself.

But even now, with all the venture capital money flowing and innovative attention being paid, the crowd at Web Summit heard Victor Matarranz, Santander's head of group strategy, make a claim that seemed to ring true: "Banks, in the end: We are not so boring."

Shane Kite is a freelance journalist based in Brooklyn.