The high cost of money has choked the flow of investment funds to many fintechs and slashed their valuations. For some, this has thwarted their ambitions of becoming major players in the financial services arena. Yet many fintechs still offer an opportunity to transform finance and need to be accommodated somehow. This won’t be easy for most banks and insurers.
The 12 years between 2009 and 2021 was a glorious period for fintechs. Investment deals grew steadily, injecting $2.4 trillion into the sector globally, according to PitchBook data. Flush with funding and with unprecedented data and new technologies at their fingertips, they homed in on the shortcomings of incumbents’ business and operating models. Rapid growth, rather than immediate profit, was their priority. In the short term, many of them promised to dramatically transform how banking and insurance are done.
These included neobanks, who have tried to take on the big incumbents with varying degrees of success, but also those focused on payments, risk and other more opaque corners of finance. Many fintechs weren’t interested in toppling legacy finance institutions – they wanted to help financial services firms operate more effectively by selling them platforms or services that they could do better or more innovatively. In most cases, fintechs are looking to work with incumbents, either as partners or acquisitions.
But the outlook for fintechs started to change with the spike in interest rates at the beginning of 2022. Over the past two years the number of investment deals worldwide involving digital-only banks and financial technology developers has fallen by 52% and their value by 79%, according to CB Insights.
It’s way too early to count fintechs out though, as they have a technology stack that is both fundamentally cheaper and more flexible to quickly build new products and services. Many of these are now being brought to market either as invisible enablers of incumbents’ enhanced offerings or as co-branded offerings. The fintechs have helped their corporate partners upgrade their operating models and performance standards, and in the process have transformed customers’ expectations.
What is emerging is a new breed of financial services provider. These firms are steeped in the traditions and boast all the strengths that allowed them to weather the storms of earlier times. But now they are empowered by vast troves of data and a more potent digital core that, together, boost efficiency, help manage risk, and enable more relevant services for demanding customers.
With some banks and insurance companies lacking the innovative ethos and requisite skills to develop these technologies on their own, those that are slow to partner with or acquire fintechs could quickly find themselves at a disadvantage.
Yet partnering is not an easy path. The cultures of long-established FS firms and creative start-ups could hardly be more different. Start-ups get frustrated with the bureaucracy and slow decision-making of large, heavily regulated companies. Banks and insurers are typically reluctant to share the upside of joint ventures, but that’s what most risk-tolerant start-ups are eyeing – rather than just licensing fees. Ongoing governance of the relationship is difficult, as is measuring the return on investment. Many banks and insurance companies have set up hubs and processes to partner with fintechs, and are working hard to get better at this.
One example is JPMorgan ChaseJPM
, which has bought or invested in more than 80 fintechs since 2021, including investing in adjacent businesses like the UK digital wealth manager Nutmeg Saving & Investment and Volkswagen Payments. While not all have been roaring success stories, many of these fintechs have helped to broaden the bank’s customer base, including with younger consumers. Recently, when JPMorgan Chase wanted to offer digital payroll processing for its small business customers, rather than build its own solution, it partnered with fintech Gusto to provide the underlying technology.
Fintechs are arguably the best thing that’s happened to financial services in a long time. They have accelerated innovation and taught customers to demand new, better services. As some incumbents have adopted and others copied and scaled fintechs’ game-changing offerings, the once change-averse firms are becoming more creative and more willing to partner. These banks and insurers have adapted their skillsets, timeframes, perspectives and cultures to be more open to new ideas. In the process they have become more efficient, agile and responsive.
These organizations have accepted the notion that change is no longer an uncomfortable interruption to business as usual, but rather a perpetual priority essential to their survival. They can choose to go it alone or seek the more collaborative and rewarding path with fintechs.
