Banks that fail to adapt to the digital world face extinction in the same way other traditional industry leaders have fallen away, according to David Lynch, managing director of Hong Kong-based DBS Bank.
Asked by Disrupt Africa whether innovative fintech startups in Africa and across the rest of the world were a threat to incumbent financial institutions, Lynch said this was certainly the case and that banks would have to adapt to the new era in order to survive.
“Banks in Hong Kong and worldwide have enjoyed margins unimaginable in most industries. It’s little wonder that startups are seeing the opportunity, as barriers to entry come down,” he said.
Banks will enjoy regulatory protection for years to come. Banks enjoy a level of confidence and security from depositors that is well deserved because of prudent regulations and controls. But once the customer is lost and the disintermediation begins, margins will fall dramatically for any bank that fails to participate in the new business models.”
These new business models are increasingly coming from startups, and Lynch said his bank had realised there was a need to work with smaller, more innovative companies in order for everyone to prosper.
“P2P lending and FX aren’t a fad. Real-time mobile payments, digital marketplaces, robo advisory, artificial intelligence-based customer service are realities already,” he said.
“It’s difficult to find banks leading in any of these areas. Forward thinking banks are however moving fast to secure the right partnerships, create their own capabilities and work actively with startups that, by their nature, threaten existing revenue streams.”
Hence the DBS Accelerator, which allows the bank to support startups in developing their solutions, which the bank can later employ or acquire should they wish to. Lynch said this form of cooperation was far more beneficial to traditional banks than attempting to compete.
“Many of the fintech startups are focusing on underserved segments of banking. As those models are proven out, they will scale and that presents a threat to traditional banks as well as an opportunity to grow new revenue streams,” he said.
“We have a choice – to watch, to buy, to build our own, to partner or to participate and learn. It won’t be the same response in every facet of our business.”
Lynch said the DBS Accelerator had given the bank an “amazing insight” into emerging startups.
“P2P business models are developing here, not just for lending but in areas like P2P FX. It’s still incredible to see the number of payment providers seeking to streamline e-commerce, help marketplaces and lower remittance costs, especially in underserved markets,” he said.
“Robo advisory is emerging as a trend here. Data analytics are really taking off and we have two really exciting startups in our first batch in this space, one with broad capabilities and another focusing on behavioural analytics. Beyond that, there’s plenty of fintech startups focusing on traditional banking and financial services, but doing so in innovative ways that bring design, mobility and speed right to the fore.”
Another traditional bank looking to cooperate with fintech startups is Barclays, which has established accelerators of its own as part of its Rise open innovation platform, in London, Manchester, New York and, most recently, Cape Town. Derek White, chief design and digital officer at Barclays, said the idea of the accelerator was for Barclays to become customers of startups, creating a mutually beneficial scenario.
“If you boil it down it comes down to a recognition that our industry is changing and tech startups are driving much of that change,” he said.
The Cape Town programme is just getting underway, but there is evidence from Barclays’ previous programmes elsewhere that it is serious about partnering with startups. Almost 30 have already signed agreements with the bank, while 10 of the 11 startups in its New York cohort have signed partnerships.
White said by partnering with startups rather than building solutions in-house Barclays was becoming much more efficient.
“It allows us to move at a pace where we’re creating in a way we’ve never done before,” he said.
This idea that startups can execute more quickly and efficiently is shared by Sanjeev Orie, chief executive officer (CEO) of Business Value Adds at South Africa’s First National Bank (FNB). FNB is a financial backer of Western Cape startup support organisation Silicon Cape, wile the bank’s Vumela Enterprise Development fund takes equity stakes in businesses that offer job creation and growth opportunities.
“Startup companies in general, regardless of their industry or service sector, are more lithe and able to target smaller niche types or segments that incumbents may not necessarily find profitable enough to warrant an offering,” Orie said.
“Because of their agility and leanness, startups are also able to scale off significantly lower cost bases, thereby altering the business case perspective that an incumbent would generally view a solution from.”
As a result, he said, startup solutions give larger incumbents something to consider, and in really innovative examples, potentially disrupt an industry.
“The slew of asset light business models that are able to scale quickly, seamlessly and cost effectively is a very good example of this change in the business case perspective and dynamics,” Orie said, naming Airbnb and Uber as examples.
The combination of startup innovation and bank resources could be a potent one, he said.
“Techpreneurs usually pitch to investors for funding so that they can actually start a business and then build their killer app. Their biggest asset is their brains. They usually don’t have all the resources to make it happen, like infrastructure, data, skills and partners. Large banks already have plenty of these assets, we are always looking for ways to use them even better and we need innovative brains as well.”
Orie said it was very exciting to be part of the growth in the innovation landscape, not just in fintech but in other sectors as well.
“As access to broadband and cellular telephony increases across the country and continent, this innovation will continue to grow and the types of business models that will arise, will be targeted at specific African and South African problems,” he said.
“Currently, fintech innovation has focused on higher LSMs, but this will start to change as the business models evolve. South African employment opportunities need to be targeted at lower skills levels – given how unemployment impacts our people – and this change will come in time.”
Traditional banks in South Africa, however, have not necessarily been left behind by startups, but must ensure that they do not in the future.
“South African companies punch well above their weight, especially when viewed in the context of the number of successful South African companies that have been able to enter into international markets and leverage their innovations across the world. The key is the ability to respond to innovation, especially disruptive innovation,” Orie said.
“The past has shown that incumbent companies are very rarely able to transition to a new disruptive technology, for example Kodak when digital photography started its impact, more so because of a lack of willingness to follow the disruptive model than anything else. Many of the innovations being launched now could have the same impact if incumbents fail to recognise the disruption and act accordingly.”