This year, no fewer than 121 companies operating in the financial technology sector applied for a place on ING’s start-up accelerator programme, FinTech Village. If anything, the success of this initiative, which is already in its fourth edition, proves that the willingness to collaborate between fintechs and banks is steadily growing. Which is no small feat, considering that fintechs pose a serious competitive threat to big, established banks such as ING, potentially costing them billions in revenue loss.
Young, usually small and seemingly coming out of nowhere: fintechs are a special new breed in the financial world. Their emergence constitutes one of the biggest changes and challenges in the financial sector ever. And as already suggested by the large number of applicants for ING’s fintech incubator, never before have there been so many new competitors for established financial institutions in such a short time. To make matters worse, these newcomers generally apply their innovative technologies to a product or service that has traditionally been offered only by financial institutions, making that product or service more attractive or easier to use for customers.
Legislation drives innovation.
So why then do these established financial institutions, such as ING, feel the need to support and even nurture these new rivals? The answer seems to lie in the wider trend towards open banking that is currently transforming our financial landscape. To a large extent, this transformation is driven by the possibilities of new technologies. Banks are changing from closed systems to open platforms, with a key role for APIs (Application Programming Interfaces): digital access ports to a company’s data and services.
But banks are also legally obliged to adopt the new concept of open banking, since the European Union introduced a revised European Payment Services Directive, known as PSD2, in 2015, with new rules and new digital business models as a result. PSD2, in short, requires banks to give Third Party Providers (TPPs) access to a client’s checking account, if the client agrees. The third party does need a specific license for this. Not only is this improved openness expected to stimulate competition, notably from fintechs, but it should also make the European financial sector more efficient and give the customer more choice.
A win-win for everyone.
If traditional financial institutions want to play a leading role in this open banking revolution, they need to collaborate more strongly and more closely with the fintechs of this world. This will allow them to create more value for their customers through customer-oriented, personalized and innovative products and services. For while banks have an enormous variety in their services and products, fintechs can focus their full attention on one specific product. The solutions that result from this approach can also be very attractive for banks to improve their own customer experience.
For fintechs, on the other hand, partnering with an established bank enables them to gain actual expertise. It also offers them a platform from which they can reach a large number of real clients and therefore grow more rapidly. So, as is usually the case with such collaborations, they ultimately benefit all the parties involved. Or as Erik Van Den Eynden, CEO of ING Belgium, puts it: “The combination of the fintechs’ creativity and their technical skills with our knowledge and our customer network can really make a difference.”