Could Cooperative Competition Offer a Way Forward for Banks and Fintechs? October 2017
Coopetition or co-opetition is the buzzword for the concept of “cooperative competition” - a term that perfectly encapsulates the current hybrid relationships that exist between banks and fintechs.
Innovative IT products and services continue to transform the financial sector, with fintechs developing specific finance technologies that have the potential to disrupt and revolutionize how we borrow money, manage our financial assets or make payments.
In recent years new e- and m-banking technologies have proven highly successful at delivering convenient and easy online access and management capabilities for banking customers. But with the advent of the Payment Systems Directive 2 (PSD2), fintech Third Party Payment Providers (TPPs) will also be given access to customer account information. In the past, during the e-banking breakthrough, the focus was on good access technology and customer authentication. Now these same technologies could potentially be used by non-banking entities to compete with banks. This shift will require a revision of existing legal frameworks to ensure customers remain protected.
The Smart Payment Association (SPA) believes that, despite the current fintech buzz, in 2020 banks will continue to play a dominant role as retail payment intermediaries. In other words, despite all the hype around new payment instruments and market incomers, the structure of the retail payment market is stable and unlikely to change for the foreseeable future. Indeed, in the last decade, only two third party initiatives have achieved breakthrough success - PayPal and Alipay in China – neither of which can be strictly considered as a fintechs.
The reality is that card payments around the globe continue to grow steadily and the observed reduction in the number of cash transactions is benefiting contactless cards, rather than alternative payment means, such as digital currencies. In seems that the recent history of the payments card market has not, therefore, been greatly impacted by the fintech evolution. In the longer term, however, the payment preferences of the Millennial generation may well determine a different future payments landscape.
The SPA notes that in recent years banks have demonstrated a great ability to pioneer and leverage their infrastructures with major IT breakthroughs and that many fintech innovations typically relate to back-office processes – something that may well represent an opportunity rather than a threat for conventional players. For example, recent blockchain use cases rationalize processing by enabling cooperation between competitors. In the present context, where bank direct investments are considered at risk, sharing efforts makes sense. This is one reason why many institutions have organized consortiums to help fund fintech research and development efforts.
Yet there are financial services - Third Party Payment Provider (TPP) services, crowdfunding - where fintech might directly compete with banks – and the financial industry at large needs to monitor and control the potential risks arising from financial services being offered by fintech incomers. New actors offering financial services might, for example, also issue their own payment instruments. Since card payments are primarily bank and scheme centric, if the banking sector’s position is challenged by fintech, so too is that of the card industry.
This challenge will be stronger if the banking industry appears weakened. With this respect, SPA notes that the European Banking Authority (EBA) has observed that following the financial crisis the European Union (EU) ’s banking sector is now consolidating. If this trend continues, there will be multiple opportunities for banks and fintechs to collaborate in the development of new services without substantial changes to the market structure.
In this paper, in the wake of the European Commission (EC) and EBA consultations on fintech, as well as the positions expressed by the European Parliament, SPA shares its views with the payment industry. While recommending a specific legal framework is outside our domain of expertise, this document is intended to prompt discussion by examining some of the issues that will need to be addressed: business models, collaborative patterns, the role of international standards and financial data security. Important questions that, in the opinion of the SPA, have not yet been sufficiently debated.
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