In the natural world, there are plenty of symbiotic relationships where two species, like the clownfish and the anemone, cooperate for mutual benefit. At first glance, the differences between the established, conservative environment of finance and the experimental, cutting edge attitude of startups appear so extreme as to prevent them working together.
However, the potential gains from joint endeavour between banks and business-to-business (B2B) fintechs are tremendous. While there are many unresolved problems, there is already significant inter-dependence. Many B2B fintechs rely on the support of banks for capital to start their businesses and often use banking infrastructure or liquidity to facilitate their business. At the same time, banks are eager to take advantage of fintechs’ innovative ideas to help them achieve their strategic objectives.
“Fintechs are able to develop and introduce new solutions quickly, that is a major advantage in this fast-paced environment,” notes Andreas Becker, head of clients and products at ING Wholesale Banking Germany and Austria.
Rivals or partners?
A study by CMS, Deloitte, and ING in cooperation with FINANCE-Research and Barkow Consulting about the German B2B fintech market aims to clarify the relationship between banks and fintechs and determine both the potential benefits, and the likelihood, of cooperation.
The study Disruptors, Enablers, Partners: Fintechs and the corporate client business of banks is the first to concentrate specifically on B2B fintechs. While focused on Germany, it contains many broader insights about B2B fintechs. As one of the interviewees in the report, Dr. Gernot Overbeck, founder and managing director of Fintura, notes: “We see Germany as the most difficult market worldwide. If we make it in Germany, then we’ll make it in [other] countries.”
The study shows that contrary to popular belief and myriad headlines about the growth of fintech, there has not been a shift from business-to-consumer (B2C) to B2B in recent years – the proportion of new startups with a B2B focus has remained stable at around 50%. Of the 284 B2B German fintechs that the study identifies, 103 provide services to companies involved in the corporate client banking business of banks; almost two-thirds of these focus on financing and almost one third on payments.
Crucially, only 13 of these companies can be classified as banks’ potential friends – a strong majority are classified as competitors of banks or market disruptors. Even among banks’ potential friends, many fintechs are platform providers and, as such, are simultaneously also disruptors.
Paradoxically, the fact that many B2B fintechs can be seen as competitors of banks makes cooperation an increasingly attractive option. The benefits of working together, and minimising competition, could prompt the two sides to work together. “Going forward, cooperation is likely to be the goal for both parties,” says Becker. “Banks and fintechs have fought each other in the past but they both bring something to the table that is valuable to the other side.”
Providing support and experience
Just as fintechs have much to offer banks, so banks are well positioned to help fintechs. Perhaps most importantly, collaborating with banks gives fintechs access to an established customer base, geographical reach, trust, and a strong brand.
Banks can also offer considerable practical assistance. It is difficult for fintechs to successfully enter the market alone for several reasons, including lack of capital, legal regulations, and lack of experience. For example, complex legal restrictions threaten the viability of some B2B fintechs. “A careful review of the regulatory framework before going into operation is… advisable because operating in this kind of business without a license is punishable by law,” emphasises Andrea Muenchen, a lawyer at CMS in Germany who contributed to the study.
Collaborating with banks helps new fintechs to overcome such issues and gain the benefit of banks’ expertise. “Fintechs have recognised that they cannot be banks in regulatory terms, and banks have realised that they cannot be fintechs,” says Muenchen. “As such, cooperation with an existing bank presents an alternative to applying for a license. Such cooperation avoids a license requirement.”
Moreover, unlike B2C fintechs, B2B fintechs cannot experiment and learn as they go, because corporate clients are unwilling to take changes given the business-critical nature of processes relating to finance. “There is no room for mistakes in the B2B sector,” says Markus Rupprecht, founder and CEO of Traxpay, who is interviewed for the report. “Quality, service and reliability are key. Mistakes in the business model are acceptable but there is absolutely no room for mistakes in the operational implementation of the business.” By working with banks, fintechs can iron out potential problems before launch and gain the confidence of corporate clients.
A new way of working
Collaboration between banks and fintechs can be difficult because the culture of each business is so different. While both groups are committed to smart financial solutions, the slow decision-making process and bureaucracy at banks, which can result in the prioritisation of process over practicalities, can be frustrating for fintechs, for instance. Consequently, many of the nuances associated with partnerships are still being worked out. However, a new way of working together is emerging as the benefits of collaboration become clearer.
Moritz von der Linden, co-founder and CEO of CRX Markets and founder of 360 Treasury Systems, regards banks as his company’s main competitors but denies this makes them rivals. “Banks are our partners because we have joint customers,” he notes. “The game is changing. We’re not disruptive, we take things forward. We don’t take customers away, rather we change the relationships. Transparency cuts the banks’ margins but it also reduces the process and acquisition costs.”
“Intelligent cooperation will create a more transparent, efficient and diverse market.”
Ultimately, it seems certain that banks and fintechs will end up collaborating more often than they would have thought possible just a few years ago given the benefits of marrying banks’ ecosystems and client base with fintech’s ability to innovate. “The coming years will give rise to a coexistence of B2B fintechs and corporate banks that will, in many places, be connected by partnerships,” the report concludes. “For the fintechs, not all their dreams will come true, but neither will the banks see all their worst nightmares materialise. Intelligent cooperation will create a more transparent, efficient and diverse market. For corporate clients, the cooperation of these two very different service providers can mean only one thing: a win-win situation.”