UK Banks vs FinTech

UK’s major banks are entering the fintech space to compete with young fintech companies and capitalize on the growing market. Fintechs have disrupted traditional banking since the early 2010s, offering innovative products and capturing significant market share and valuations.

Fintech Growth Areas

- Fintech is expanding across various domains: banking, payments, insurance, wealth management, digital assets, and more.

- This diversification offers traditional banks opportunities to move away from reliance on interest rate-sensitive products.

Banks' Entry Strategies

1. Software Licensing (SaaS): Starling Bank’s Engine:

Engine, Starling Bank's SaaS unit, provides white-label banking software to international banks. It aims for significant growth, with predictions it could reach a £10bn valuation by expanding its customer base. Competes in a crowded market with players like Thought Machine, Mambu, and 10x Banking.

Competitive Landscape:

Thought Machine has secured deals with major banks like Lloyds, JPMorgan, and Morgan Stanley. Former Barclays CEO Antony Jenkins highlights the need for technological innovation in banking.

2. Payments and Foreign Exchange (FX): HSBC’s Initiatives:

HSBC’s Zing app competes with fintechs like Wise and Revolut in international payments. HSBC's partnership with Tradeshift focuses on embedded banking products. HSBC’s approach includes creating ring-fenced entities for risky market entries.

3. Embedded Finance (BaaS): Natwest’s Boxed:

Natwest launched Boxed with Polish fintech Vodeno, focusing on banking-as-a-service (BaaS). Boxed aims to integrate financial services into corporate client offerings, similar to Klarna and Frasers Plus. BaaS presents a significant revenue opportunity and could contribute to future-proofing Natwest’s business.

Standard Chartered’s Nexus: caters to social media and ride-hailing firms, indicating banks' interest in embedding financial services into various platforms.

4. Acquisitions: Lloyds’ Strategy:

Lloyds has been active in acquiring fintechs like wealthtech Embark and protection advice firm Cavendish Online. Investment in fintech is seen as a strategic move to expand market share, especially as sector funding declines.

Challenges and Opportunities

Scaling Difficulties: SaaS and BaaS models have faced challenges in scaling, with complex and lengthy sales processes to large banks. Despite these difficulties, there remains a substantial opportunity to embed financial services.

Investment and Partnerships: The decline in fintech funding has made acquisitions attractive for banks, but execution risks and integration challenges remain. Strategic partnerships are seen as a likely alternative to outright acquisitions due to these risks.

Technological Evolution: Banks are evolving their systems to offer similar or superior features to fintechs. Yet, traditional banks still struggle with high costs and complex core technologies compared to agile neobanks.

To Sum up:

UK’s major banks are exploring multiple strategies to penetrate the fintech space, from software licensing and payments to embedded finance and acquisitions. Each approach has its own set of challenges and opportunities, but banks recognize the necessity to innovate and adapt in the rapidly evolving financial landscape.