10 May 2019

Bloomberg: Banks waking up to Fintech threat throw billions into digital

Scrappy online financial startups have spent the past few years building buzz, backing and the beginnings of a customer base. For a while, the world’s banking giants largely ignored them. Now they’re starting to feel the heat—and fighting back with the most formidable weapon in their arsenals: cash.

Spain’s Banco Santander SA announced a few weeks ago that it will funnel 20 billion euros into digital transformation and information technology in the next four years.

On an annual basis, that works out to one-and-half times all of the venture capital Europe’s fintech startups received in 2018—a disparity highlighting that, despite all their rhetoric about burying existing banks, fintech firms and neo-banks are still monetary pipsqueaks facing an uphill battle against entrenched competition.

“I am more pessimistic than ever for these startups,” said Mark Tluszcz, a partner at Luxembourg-based venture capital firm Mangrove Capital, who’s been a vocal skeptic of the fintech sector. “Even though we all love to hate our bank, we still fundamentally trust the bank that, if we put our money there, it is not going to disappear overnight. And the fintechs have struggled to win that trust.”

In a matter of years, digital banks like Revolut Ltd., Starling Bank Ltd. and Monzo Bank Ltd., all based in London, have attracted several million clients by offering perks like ultra-low-cost money transfers and pre-paid debit cards with no foreign transaction fees. Yet even though people open secondary accounts with these neo-lenders, they’re still reluctant to give them their salaries—let alone make them the main conduit for their retirement savings or mortgages.

This has bought big banks time to attempt to beat the fintechs at their own game, a challenge some are seizing more boldly than others. Even with its 20 billion-euro blueprint, Santander would be only No. 5 globally when ranked by annual technology spending; JPMorgan Chase & Co., the top spender, has committed $11.4 billion in 2019 alone.

For now, fintechs say they aren’t spooked by the sizable tech budgets. Traditional lenders are merely trying to catch up, not push innovation, according to Monzo’s head of marketing, Tristan Thomas. “So far they seem to be focused on skating to where the puck is, rather than where it’s going,” he said.

And while most fintechs are turning losses, they have one big thing going for them: they don’t have outmoded technology weighing them down. Many major banks would need to spend billions of dollars just to bring their IT systems into the 21st century. Even Santander’s Parthenon back-end software platform is increasingly antiquated even though it is newer than what a lot of the other European banks use.

 “While they can copy our features, they cannot copy our cost base,” Starling Bank said in a statement. “They have to contend with legacy technology, not to mention the massive costs of maintaining a branch network and the slowness to action that is inevitable with large bureaucracies.”

All those costs ultimately get passed on to customers in one way or another, according to Kristo Kaarmann, the chief executive officer and co-founder of TransferWise Ltd., which offers cheaper international money transfers. “If you spend a lot, you have to charge a lot,” he said, adding it would make far more sense, from a cost basis, for the banks to partner with fintechs than to try to duplicate their offerings.

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© Bloomberg