May 11, 2023
Fintech Ecosystem Means Openness and Collaboration #
Some would argue that the world is in complete disarray right now. Banks collapsing and being bailed out, a result of the global recession, the war in Ukraine, global warming sending mother nature crazy, and everything in between.
Others would argue we have never had it so good, with the huge advancements in communication, technology and power shifting back to the people through the mobilisation of both.
But where does fintech sit within all of this?
Recent events over the past couple of weeks certainly set alarm bells ringing. The takeover of Credit Suisse by UBS, HSBC’s acquisition of Silicon Valley Bank for the princely sum of £1. Redundancies are happening at an alarming rate and VC money has dried up. If you haven’t cut costs already, could you be too late? We have seen the demise of the fast-growing unicorn Railsr. More are anticipated to follow, especially given the significant squeezing of funding from VCs and elsewhere.
But I remain optimistic. Why? Well, I guess I consider myself an optimistic person at the best of times. It’s also better for my mental well-being and attitude towards what I can control.
I believe that all of these catastrophes help focus the mind and create innovative solutions, which more often than not involve collaboration.
The fintech ecosystem has undergone significant transformation over the past few years with a growing number of collaborations and partnerships between fintechs, banks, and governments. The industry is becoming increasingly open-minded to collaborate and innovate.
Fintechs have emerged as disruptors in the financial industry, offering innovative and personalised services to customers. The collaborations between fintechs, banks, and governments have opened up opportunities for innovation, cost reductions, and customer engagement, while also introducing new challenges and threats to the financial industry.
To meet customers’ rising expectations, companies have extended their range of products and services as never before. Spurned by Covid, companies have realised that building on their own is costly, slow and usually not as effective. Alliances with other companies, even competitors, have been seen to deliver a better customer experience through these complementary networks of offerings and services.
Companies are turning to APIs to help build bridges to other organisations and unlock each partner’s unique data and capabilities. (Source: IBM)
Increased partnership velocity is being enabled by the increasing number of Application Programming Interfaces (APIs) in the marketplace. These APIs enable different systems and applications to communicate with each other, allowing fintechs to access data and services provided by banks and other businesses, whilst also enabling banks to offer their services to a wider range of customers, including those who may not have traditionally had access to banking services.
It’s now easier to partner and launch at speed, adding immediate value to your product or business — in a matter of days rather than months or even years.
So these collaborations and partnerships are continuing to drive evolution and in my recent experience, I am seeing historically competitive businesses collaborate through finding the white space where a joint value proposition is better for the market and ultimately, the industry.
Open ecosystem #
This increased partnership level and availability of open APIs are helping spur the development and scale of marketplaces.
Big tech companies are taking full advantage of these open APIs which can pose both a threat and opportunity to the fintech ecosystem
The big tech players such as Microsoft, Google, and Apple have large customer bases, extensive technological capabilities, and strong brand recognition. This makes them well-positioned to disrupt the financial industry and they are doing so via significantly growing marketplaces of both proprietary services and third-party providers.
They all generate significant revenue through their curated marketplaces. These marketplaces and ecosystems are largely reliant on their growing partner network. Satya Nadella, Microsoft’s CEO, says it best: “Microsoft has always been a partner-led company and will always be a partner-led company”.
This highlights the significant importance placed on partners and with a 3% commission model you can see that they don’t price themselves out either. Others have since followed suit, dropping from an average of 20% to 3%.
Incumbents such as traditional banks have also recognized the threat that fintechs and big tech pose. Many banks have responded by creating their own fintech subsidiaries, partnering with existing fintechs and exploring marketplace offerings. This has led to increased competition, as well as increased collaboration between fintechs and banks.
Celent’s recent white paper highlights that banks have started to recognise these open ecosystems as a key priority for 2023. 23% of bank executives said “Taking an ecosystem approach to growth is the most urgent priority for 2023”.
So the tide is turning regarding banks participation in partnering and collaborating yet there are still some challenges the fintech community face with each other and banks.
- Fragmentation: The fintech industry is highly fragmented, with thousands of players offering diverse solutions. This fragmentation makes it difficult for fintech companies to collaborate effectively, as they may not have the necessary infrastructure, standards, or protocols to integrate their solutions with those of other companies.
- Competition: Fintech companies often compete with each other in the same market segments, making it difficult for them to collaborate. They may be reluctant to share proprietary technology, data, or processes that could give their competitors an advantage.
- Regulatory hurdles: The financial services industry is highly regulated, and fintech companies must comply with a myriad of laws and regulations. This complexity can make it difficult for fintech companies to collaborate, as they must ensure that their solutions comply with applicable regulations.
- Data privacy and security: Fintech companies rely on large amounts of data to deliver their solutions, and data privacy and security are critical concerns. Fintech companies must ensure that they are compliant with data protection regulations and that they can maintain the integrity and confidentiality of the data they collect and process.
- Innovation: Collaboration can lead to the development of more innovative solutions. Fintech companies can leverage each other’s strengths and expertise to create new solutions that are more efficient, cost-effective, and user-friendly.
- Market expansion: Collaboration can help fintech companies expand their market reach. By partnering with other companies, they can offer their solutions to a broader customer base and access new markets.
- Cost savings: Collaboration can lead to cost savings by sharing resources and infrastructure. Fintech companies can collaborate to develop common standards and protocols, reducing the costs of integration and maintenance.
- Improved user experience: Collaboration can help fintech companies improve the user experience by integrating different solutions into a seamless customer journey. By collaborating, they can offer a more comprehensive and convenient solution to their customers.
Expected trends #
- Platformization: Fintech companies are increasingly adopting a platform-based approach, where they offer an ecosystem of solutions that can be integrated with each other. Platformization can help fintech companies collaborate more effectively by providing a common infrastructure and standards and help with distribution by selling their solutions on other platforms, marketplaces
- Open banking: Open banking is a regulatory initiative that requires banks to open up their APIs to third-party providers. This initiative can help fintech companies collaborate by giving them access to banks' customer data and infrastructure.
- Artificial intelligence: Artificial intelligence (AI) is increasingly being used in the fintech industry to automate processes and improve decision-making. Fintech companies can collaborate by sharing AI models and data, leading to more accurate and efficient solutions.
In conclusion, the fintech ecosystem is well placed to take advantage of collaboration, if it can face the challenges of fragmentation, competition, regulatory hurdles, and data privacy and security concerns. However, collaboration offers several key benefits, such as innovation, market expansion, cost savings, and improved user experience, which can all happen at speed vs trying to do everything yourself.
Through the use of open APIs and a willingness to move at speed, fintech can help drive the entire financial ecosystem through a partnership approach and persevere through the tough times we are in.