Fintech showdown: Banks firing blanksby
Richard Sergeant explores whether the bet on acquiring fintech's to bolster their proposition is paying off for the big banks.
Traditional banking function and challenger bank competition aside, the big banks have been exploring various avenues of accessing the lucrative small business fintech market.
2020 has shown that moving away from core banking activities has been a stretch at best, and market damaging at worst.
So is the cut and thrust of commercial fintech actually proving that banks backing hotshots are actually more likely to be shooting blanks?
The disappointing closure of Asto by Santander in January highlights how difficult it has been to turn a good market runner (through the acquisition of Albert in 2018) into a market winner. Albert boasted an estimated 10,000 accounts at the time, and significant progress was made in both developing the technology and products available – particularly select invoice financing to their core freelancer customers.
The freshly re-renamed Natwest (via their lauded Natwest Ventures arm) also pulled the plug on the promising APtimise service in 2020. The end-to-end accounts payable service was of particular interest as it also enabled payment initiation if you had a Natwest business account. Great for accountants who were offering treasury services for clients.
And as you dig around the list goes on.
The problem with banks
If we park up any ‘Covid effect’ on the economy, not least because very many other fintech’s seem to have boomed in the last 12 months, there are other reasons why banks have struggled to make some of these ventures work.
Some have been overseen by some very experienced banking professionals with very corporate CVs, and perhaps not enough experience of the actual customers they are trying to serve. Accountants are well placed to talk about the needs of their small business customers precisely because they work day in/day out with them – corporate lifers and techy founders less so.
Banks are also carrying huge amounts of antiquated systems and internal IT infrastructure that holds them back, an issue which is so well documented that it almost feels boring to mention it.
Then there is the fact that too much expectation has been put on the brand and reputation of the bank, and even the branch network (if that still exists in the SME banking world) to make the sale. Even the largest provider of business banking, Natwest, has hardly been able to turn the purchase of FreeAgent into a serious Xero or Sage contender, even when giving it away for free.
Which leads us to the question of whether banks actually ‘get’ SaaS businesses full stop.
Trying to develop and sell a fintech product at a relatively low price point is hard. Just ask any of the providers out there that are targeting accountants or the clients of accountants. It takes a lot of time, effort and funds to keep going in order to make the breakthrough.
Laying down slivers of subscription fees takes a while to become meaningful - and services like APtimise were never going to make a big contribution in a hurry. Patience has to be part of the business model.
Being impatient doesn’t help to develop customer trust
If you’re relying on your brand to make a difference to the sales proposition, and are operating close to the vanguard of adoption, laying a few bets to see what works could pay dividends. But it also means they are easy to jettison. This leaves early adopters with some work to do to find alternatives, including accountants who have moved to new systems in the past 18 months that have now been pulled.
Of course, you might be in the same situation with any start-up, but at least you can assess the risk in different terms. What does the balance sheet look like? Do we have faith in the founders? Trust is an important part of weighing up your tech stack, and what you are comfortable recommending to clients.
Banks playing poker in this way doesn’t suit them and gives decent products a disposable feel.
Not core enough
Lending and payments are where the majority of their revenue will still come from the small business market for some time to come, so perhaps there is life for services such as Tyl as small businesses start to adopt less cash preference for payment, or move online.
Faced with the huge requirements of government-backed loan administration (and we haven’t got to the collection piece yet), and clients who will continue to face financial challenges for a significant time to come, perhaps it’s right that they stick to the knitting.
In other words, fintech dabbling in other areas is just not core enough.
Integrate and cooperate
Given the amount of innovation being driven by less constrained challengers in the market, it’s easy to see how some of these experiments are entirely defensive. However, there have been some interesting signs of a new approach, particularly with Lloyds and their assertion to be API first (typified by their adoption of OneUp accounting for business account users and the recent partnership with Satago), and even the FreeAgent and Hiscox tie , which has promise.
So, perhaps the answer isn’t to own the solution, but to integrate, cooperate – and let everyone do what they do best