Banks need to become tech companies - or they won't be around for much longer

THE WORLD’S LEADING banks need to start thinking of themselves as technology companies or risk being left behind in the next wave of the fintech revolution, a top investor says.

Many banks internationally, and even big players on these shores, are pouring resources into the tech side of the business and rendering traditional banking functions obsolete.

Earlier this week, Bank of Ireland announced it has plans to invest significantly to upgrade its digital infrastructure – the final cost of which could hit €400 million – while some established financial players are teaming up with the likes of Irish payment startup Stripe.

Leading fintech investor Pascal Bouvier, a partner at fintech specialists Santander InnoVentures, told Fora that banks which ignore the benefits of fintech won’t be around for long.

“Every participant in the industry, be they small or large, old or new, will have to become more of a technology company. There are a couple of companies in the industry that have figured that out already,” he said.

“Market structure firms like Nasdaq know that they are a tech company and payment network firms Visa or Mastercard, if you talk to people in these firms, say they are tech companies and not payments companies.”

Pascal Bouvier

Banks vs startups

According to Bouvier, who will be in Dublin next week for the launch of a NDRC pre-accelerator programme for fintech startups, businesses are currently in the middle of the second wave of the fintech revolution, with the third phase just around the corner.

While the first wave was concentrated on the potential of startups developing technology that would take down traditional banking models, he said it was no longer as simple a relationship as that.

Fintech has evolved past a ‘us against them’ mindset and startups are growing into providers of technology for the like of banks and insurance companies, he added.

“Framing the discussion around startup versus incumbent within financial services is the wrong framework. There is a greater world out there that wants to eat a bank’s lunch, large tech companies like Facebook, Apple and Amazon. And in Asia, it is beasts like Tencent and Alibaba.

“Will these tech giants figure out a way to fold in the conversations and transactions we have around financial services and products, and how will incumbents react to that? Will they become partners that retain a strong link to the end-user or will they become providers on the background? That’s the main issue, rather than startups versus banks.”

Hype in fintech

There has been a lot of hype in fintech in recent years, with global investment in the sector surging from $2 billion in 2011 to over $14.5 billion last year, according to analysts CB Insights.

Looking at the figures in context, however, Bouvier said the current investment being pumped into fintech will fuel only a fraction of the change that is needed in financial services.

“This year there will be $19 billion invested in fintech, but you look at these numbers very carefully, as a share of global GDP, financial services is around 16%, which means it is $16 trillion value add.

“The VC activity in fintech increasing to $19 billion is not going to make a dent. I’m not going to say that the activity is going to stay at where we are. But what I’m convinced is that year in, year out, VC investment in the industry will help save $3 billion to $4 billion fairly easily based on the amount of workflows and processes that need to be reinvented.”

Fintech startups that develop tools to automate financial services and save the industry billions is where Bouvier said he is primarily looking to invest.

However he believes that in the coming years the biggest cheques will be reserved for fintech companies using artificial intelligence and robotics – firms that will be at the heart of the industry’s third wave.