Fintechs, Banks, or TechFins? Which will be the winner?

In this paper differences in the business models of Banks, Fintechs, and Techfins are analyzed and ideas in favor or against each of the three business models and their possible future growth are proposed.

1. Terminology

1.1. Fintech: FinTech Short for Financial Technology is already a multi-billion-dollar industry that is rapidly changing economies around the world by borrowing, lending, paying or even transfers through your smart devices without needing a traditional bank[1].

1.2. TechFin: it refers to the category of technologies developed by the huge technology firm that wants to deliver financial products on the basis of existing tech solutions. Classic examples of Techfin institutions include Google, Amazon, Fаcеbook, and Apple (GAFA) in the United States, and Bаidu, Аlibаbа, and Tеnсеnt (BAT) in China. Apple Pay, GooglePay, Alipay, and other products which these companies set up in cooperation with traditional banks are categorized under this category in our paper.

[1] The mobile banking services are not categorized under this category, in this paper, we separate this from the Fintechs and categorize it under the banking sector.

1. What are the main reasons that we believe the FinTechs will fail in future?

In our definition, the Fintechs like other startups suffer from the challenges of funding, competition, customer behavior, expectations and more. But fintechs have the added complication as described below:

1.1. Not enough capital

High cost of acquiring the client will increase the amount spent on the marketing side of the business. While routinely, it is easier for the banks to acquire clients by promoting the same features on their Mobile Applications. We believe that the banks can be more cost effective in case of development of their technologies and marketing for that.

1.2. The Startup mindset of Growth does not work in Fintechs

FinTechs, are a kind of startups that like all other startups, at the first days of their activity, do not have a solid model of revenue generation. But the difference is that customizing the new models of revenue generation leads to higher costs of compliance in comparison to the routine startups.

1.3. Low barrier of entry and High competition in the market and not understanding the customers

The barrier of entry to this market is not comparable to that of Bank industry. Every day we see ads about a new application for payment, an Algorithm Based trader app and so on. This leads to an increase in the marketing cost per se.

1.4. Skirting the rules

The fintechs suffer from two prospective, one from the laws that supervise the activities of a technological company, in information security and electronic commerce laws, but also the tough regulations that bind the financial industry, e.g., regulations on money laundering, KYC, anti-terrorism funding, payment services security (EU’s Payments Service Directive 2 in EU or Information Protection and Security Act) and so on. In addition to that, there should be always compliances regarding to each territory that the business is involved.

1.5. Lack of experience of the founders from Strategic partnership faults to not knowing when to bail out leads to fail of the Fintechs:

There are a lot of stories about the fintechs that could not decide wisely in defining an Exit Strategy and hence, lost their value. Point cast is a classic example and a pioneer Fintech that in the dot-com bubble period decided not to accept an offer of $450 million from Newscorp, and 3 years later accepted an offer of $7 million from Pointcast. Lack of experience in these startup teams leads to high failure rate and not a successful exit from the market.

2. What are the main Influential Parameters of Dominance?

According to a recent investigation by Deloitte, there are four key factors for success of Fintechs, Banks or Techfins to dominate the market, which are presented in figure 1.

1. What are the main reasons that we believe the FinTechs will fail in future?

In our definition, the Fintechs like other startups suffer from the challenges of funding, competition, customer behavior, expectations and more. But fintechs have the added complication as described below:

1.1. Not enough capital

High cost of acquiring the client will increase the amount spent on the marketing side of the business. While routinely, it is easier for the banks to acquire clients by promoting the same features on their Mobile Applications. We believe that the banks can be more cost effective in case of development of their technologies and marketing for that.

1.2. The Startup mindset of Growth does not work in Fintechs

FinTechs, are a kind of startups that like all other startups, at the first days of their activity, do not have a solid model of revenue generation. But the difference is that customizing the new models of revenue generation leads to higher costs of compliance in comparison to the routine startups.

1.3. Low barrier of entry and High competition in the market and not understanding the customers

The barrier of entry to this market is not comparable to that of Bank industry. Every day we see ads about a new application for payment, an Algorithm Based trader app and so on. This leads to an increase in the marketing cost per se.

1.4. Skirting the rules

The fintechs suffer from two prospective, one from the laws that supervise the activities of a technological company, in information security and electronic commerce laws, but also the tough regulations that bind the financial industry, e.g., regulations on money laundering, KYC, anti-terrorism funding, payment services security (EU’s Payments Service Directive 2 in EU or Information Protection and Security Act) and so on. In addition to that, there should be always compliances regarding to each territory that the business is involved.

1.5. Lack of experience of the founders from Strategic partnership faults to not knowing when to bail out leads to fail of the Fintechs:

There are a lot of stories about the fintechs that could not decide wisely in defining an Exit Strategy and hence, lost their value. Point cast is a classic example and a pioneer Fintech that in the dot-com bubble period decided not to accept an offer of $450 million from Newscorp, and 3 years later accepted an offer of $7 million from Pointcast. Lack of experience in these startup teams leads to high failure rate and not a successful exit from the market.

2. What are the main Influential Parameters of Dominance?

According to a recent investigation by Deloitte, there are four key factors for success of Fintechs, Banks or Techfins to dominate the market, which are presented in figure 1.

Figure 1. The main factors contributing the success of the Fintechs.

What we believe in is that among the whole parameters mentioned, Fintechs can hardly compete in the three main categories of Capital, Demand and Policy and regulations with the Banks and Techfins. On the other side, advent of Open Banking concepts, and API developments for the banking services, by involving the third party beneficiaries, may lead to an increase in profitability for banks by lowering the costs of human capital and operational costs.

When it comes to demand, Techfin, like google Pay and other similar products, having a huge data base of clients, and low costs of advertising, proved a successful outcome on the cooperation of the banks and the international huge high techs. Lets not, undermine the ease of access of big tech companies to the customer data, preferences and risk aversion, which at the end of the day leads to lower risks for the banking sector.

Conclusion:

In this article, the three main players in the banking industry are checked and we investigated the key success factors in this industry. According to this study, advent of Fintechs and novel eBanking concepts, like Open Banking, will lead to a slump in the Fintech industry.

References:

Chaikovskyi, Yaroslav, and Yaroslava Kovalchuk. “Modern fintech directions in the banking sector.” Zeszyty Naukowe ZPSB Firma i Rynek 1 (57) (2020): 71–79.

Hendrikse, Reijer, Michiel van Meeteren, and David Bassens. “Strategic coupling between finance, technology and the state: Cultivating a Fintech ecosystem for incumbent finance.” Environment and Planning A: Economy and Space 52.8 (2020): 1516–1538.

He, Zhiguo, Jing Huang, and Jidong Zhou. “Open Banking: Credit Market Competition When Borrowers Own the Data.” NBER Working Paper w28118 (2020).