The success of the banking business already depends on the ability to introduce new financial technologies. The global crisis has made this task even more relevant.
The largest Russian banks are closing offices due to the threat of COVID-19. Even the most traditional financial institutions are looking for the ways to transfer standard transactions to the online mode, where all their clients were forced to. Sooner or later, the pandemic will end. Still, user habits will remain, and banks now need to develop the quality and sustainability of their online services. The speed of change becomes crucial for them.
Even before quarantine, it was difficult for Russian banks to compete in the conditions of constant updating of financial technologies and business models. By the prevalence of fintech-services, Russia, in 2019, took third place in the world. According to EY, 82% of active online consumers surveyed used them. Traditional banks, meanwhile, are rapidly losing customers’ trust. The largest of them are trying to keep customers and reduce costs by merely buying start-ups. But what should the rest do? In Europe, banks and corporations from other industries are teaming up to benefit from working with fintech newcomers to the market. How is this model different from others, and how can it help banks with digital transformation?
Some large banks are already trying to become something more than a bank. In 2019, German Gref said that Sberbank “is a fairly large ecosystem,” and the word “bank” for him is “not a completely accurate story”. In Sberbank's strategy for 2020, successful competition with technology companies has been identified as one of the digital transformation goals.
The Founder of Tinkoff Bank, Oleg Tinkov, back in 2013 during the IPO indicated to investors that his business should not be considered financial, but technological. At New Year's corporate party in 2018, he stated that Tinkoff is an online company.
According to KPMG, 86% of the top 20 banks in Russia have their technology development programs, the Bloomchain report for 2019 states. Most part (81%) of banks are convinced that digitalization will increase their operational efficiency and reduce costs. They pay the most attention to the development of artificial intelligence, Big Data and predictive analytics, robotics, chatbots, and optical recognition.
However, banks often try to transform untransformable: large financial institutions are too clumsy. They do not have time to introduce innovations at the rate of changes in the external environment, which in their scale and pace significantly exceed the crises of the previous 20 years. In 2018, the founder of Revolut Nikolay Storonskiy emphasized that the advantage of start-ups, as opposed to banks, is much faster automation of processes and the possibility of more flexible pricing. In discussion with Oleg Tinkov, he said that Tinkoff Bank had achieved those innovative solutions that the start-up managed to implement three years earlier.
Of the 86% of banks that supposedly have a transformation strategy, the majority is not engaged in a long-term strategy but implements a pilot project package. The remaining 14% are not involved in digitalization at all, and small banks simply do not have enough resources for changes.
In this situation, banks should not compete with fintech start-ups but look for ways to interact with them. In this context again relevant the long-established term “coopetition” which combining the processes of competition and collaboration.
With large banks, everything is more or less clear: they solve their basic tasks by growing start-ups inside themselves or buying them. Fintech start-ups, in turn, see in cooperation with banks the opportunity to gain access to infrastructure and customer base. These factors are directly proportional to the size of the bank. Herewith, additionally telecom companies act as competitors for banks. They do not have a banking license, but they can provide quick access to their multiple customers. Most questions remain regarding small banks. In this situation, they can only have innovative niche strategies. This means they also need fintech.
One of the promising forms of cooperation for such banks is the creation of multi-corporate venture capital funds, where LP (partners) are institutional investors and several corporations at once. About 30 such venture capital funds (such as Pangaea Ventures Ltd., Quadrille Capital and The Innovation Fund) are running in Europe. Abroad, such funds make it possible to invest not only in small but in large fintech start-ups and neobanks- such as N26, Monzo, and Revolut. However, there are not so many funds with a focus specifically on fintech or adjacent areas so far, among the most famous are Xange, Capnamic Ventures, IRIS Capitaland and others.
For example, IRIS Capital is a French fund with offices in several countries. It has been investing in companies throughout Europe and the USA for almost 30 years. He is interested in start-ups in several areas: from artificial intelligence and Big Data to the Internet of things, cyber-security, and 5G. Its partners are not only banks but also companies from other industries. Except for the oldest French bank La Bred Banque Populaire, there is also telecommunication company Orange, media group Publicis Group, manufacturer of automotive components Valeo and legal and consulting company BPI Finance.
Such organizations are in between classic and corporate venture capital funds. They allow to neutralize the lack of the latter, which depends entirely on one corporation: if its strategy changes, both the fund and its portfolio companies may not be needed. In a multi-corporate fund, in this case, always remain other corporations that are, to one or another degree, interested in cooperation with the funded project and its development. It is assumed that management teams of multi-corporate funds have studied their LPs well enough and choose investment objects according to their needs.
In the future, technologies and solutions for such projects can be integrated into the services of fund investors. In fact investors receive a portfolio of projects that not only bring financial results but can also create significant added value as part of their strategies.
The consequences of isolation ruin businesses and economies, and at times squeeze the time for decision-making. With the increasing speed of changes and competition for the consumer, multiplied by the unpredictable turbulence factor, participation in such funds is no longer just precaution, but a chance for traditional banks. Especially for those who do not possess super resources.