We often talk about the democratization of technology, but perhaps less so about the democratization of finance. Similar to the former, the latter is the process of giving access to financial services to more people. Why is that important? Having access to financial services, whether it’s through a bank account, loan or payment network, is a way to escape poverty and participate in the mainstream economy. If you solely rely on cash, have no access to a bank account because you don’t have enough money to open one, you can’t physically access a financial institution or you lack the necessary documents such as a national ID, your means to participate in the economy and build wealth are very restrained.
In the past years, through the emergence of fintech/techfin companies, new products, partnerships, and technologies, we’ve been witnessing the democratization of finance. These companies and products are rapidly changing the banking industry; a commonly viewed conservative sector. In this piece, we’ll explore two factors that are contributing to the democratization of finance; 1) the changing nature of banks by technology, from traditional banks to neobanks, and 2) the emergence of partnerships in fintech.
Neobanks: Go neo or go bust
Technology is changing the financial and banking landscape. In recent years, we’ve observed the development of neobanks by tech companies from Europe to North and South America. Whether you call it neobanks or challenger banks, both names convey their inherently new and challenging character.
Neobanks are banks that exclusively operate online with no traditional physical branches. Unlike traditional banks, neobanks are technology centric where they automate in real-time their accounting and reconciliation services. They offer basic banking services such as checking and savings accounts, payment and money transfers, but some also offer budgeting help, cryptocurrency accounts, and other novel products.
We believe that challenger banks are the natural evolution of traditional banks and their value propositions are more compelling than traditional banks. As the world becomes increasingly digital, it’s only normal that the banking industry also becomes more digital. Younger generations are used to digital tools to work, communicate, for entertainment, finance, and much more. They expect exceptional UI/UX, better products that are easy to use and have a great design because they are used to navigate through online platforms. And neobanks answer these needs and expectations by being digitally native.
Moreover, although traditional banks have a long track record of reputation and trust factor that challenger banks may not have, the level of trust in central financial institutions is debatable. Surveys on the level of trust in banks seem to have a wide range of results making it perhaps difficult to see the global trend (Edelman, 2019; PwC, 2019; Accenture, 2019). More so, there are strong disparities between countries and regions where the Asia-Pacific region has the highest level of complete trust with 54% while in Europe, this level is at 36% (EY, 2016). The fluctuant level of trust in banks could be favorable to neobanks in their adoption rate, especially among the demographics who are more tech-savvy and open to innovative financial products. For challenger banks, these different segments of the population represent opportunities that traditional banks have yet to tap into. Fintech companies are not only targeting millennials, but they are trying to reach the Gen Z. Kard in France, Step in the U.S., and Mozper in Mexico are all neobanks that are targeting the Gen Z with their products.
Neobanks are very disruptive by being technology focused and by targeting underserved segments of the population. But will they ever fully replace traditional banks? Maybe not. At least, not in the next five years. Banks remain a complex institution with a wide range of products and services and they need to comply with numerous regulations. However, we believe that there will be less and less physical branches and traditional banks need to adapt to this constantly changing landscape if they want to remain relevant. The fintech ecosystem is moving fast, innovations are emerging from everywhere, and banks need to either build innovative products themselves or create partnerships with fintech companies that have the expertise in technology to offer these products and stay ahead of the market.
The partnerships era: The only way to thrive in the fintech ecosystem
From “us versus them” to “them with us”, the way bank and fintech companies see each other has evolved over time. Both have realized the added value of working together rather than competing against each other to stay ahead of the curve in a highly competitive market. We seem to have entered a partnership era where big banks partner with fintech companies to build novel products.
From small to big partnerships, with well established tech companies such as Google to newer market entrants, partnerships come in different shapes and forms. ING partnered with Kabbage to offer loans to small and medium enterprises (SMEs). JP Morgan Chase partnered with Plaid to protect consumers’ financial data. And we partnered with SCB 10X to contribute to Siam Commercial Bank’s (SCB) digital transformation by providing our technologies. These are only a few examples where banks decided to partner with fintech companies to enhance their products and services.
The opposite is also true where neobanks partner with well established financial institutions and companies. For example, what do Revolut, Nubank, N26, and Monzo have in common? They all have partnered with either one or two of the largest payment networks, Mastercard and Visa. These kinds of partnerships can help challenger banks and fintech companies scale faster, and ultimately reach a wider population. Fintech companies benefit from these partnerships, as traditional financial companies have strong brand recognition, a large number of existing consumers, and deep experience and knowledge in navigating through complex regulatory environments.
Building a diverse financial ecosystem to drive inclusion
The changing nature of banking with neobanks combined with the age of partnerships create a more diverse financial landscape that contributes to the democratization of financial services. By creating new products that often target either underserved segments of the population or segments of the population that welcome innovation, neobanks and fintech companies are reaching a broader audience. They are talking to people who may not have always been addressed to and are listening to their needs. Developing the same products traditional banks offer, but under a new name is not de facto contributing to a more inclusive financial system. However, by developing products that haven’t been built or offered before, and by creating new digital channels of distribution, neobanks and fintech companies are helping more people to access financial services; and that contributes to the democratization of finance. Ultimately, it drives inclusion. We’re witnessing a change in how people can participate in the economy and how people can connect to a financial system that is more diverse and inclusive. And that’s what happens when neobanks and fintech companies have a say in the banking industry; finance becomes a democratized process.