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Fintechs: really the new normal?

Subscribers to Lafferty Group's Retail Banking 2020 research service will receive their copy of our new fintech and banking report in the coming weeks, featuring in-depth case studies about partnerships, collaborations and accelerators between traditional players and nimble sidekicks.The rise of fintechs is one of the most talked-about developments in the industry since the turn of the millennium, their prominence boosting with every passing year — although their long-term place in the financial industry has never been guaranteed in the face of dominant, more experienced traditional banks.It is only now that fintechs are starting to become a central force but the rhetoric surrounding fintechs has changed considerably, particularly in the last two years. Where once they were viewed as firms who could challenge the monopoly of traditional banks and perhaps take up the mantle of customers' go-to financial destination, they are now often dubbed as perfect partners or suitable bedfellows.The times of fighting for a share of the duvet are gone — now it's more about figuring out which bed looks comfier. Collaboration, at least in the banks' eyes, has replaced competition.START-UP SUCCESSVying for the opportunity to partner with traditional institutions, a lot of fintech start-ups are entering accelerators, partnerships, incubators or internal labs to benefit from the funding, expertise and mentorship that accompanies such a move.Much of the time, despite the many different names they have, these programs often share a variety of common traits. They are densely populated, brief but intense events where development and learning are truncated into the space of three-to-six-month periods, and although they can't guarantee success, they provide the necessary advice and contacts for start-ups to achieve it.From conversations with these banks and some of the fintechs which have come through their programmes (or ones the banks have close ties with), Lafferty Group has gleaned some intriguing insight into the structure, purpose and benefit of these collaborations.With internal bank innovations — such as the labs which Latin American financial institutions Banco do Brasil and Banco Bradesco have (both of which will feature in our upcoming report) — fintech start-ups have the opportunity to work in a bank-owned space on projects that could be implemented by them, or even acquired by them outright to be streamlined into the banks' way of doing things.THE COMPETITION HAS SHIFTEDEven for the fintechs that don't foster a strong relationship though, it's easy to imagine how time spent with a big bank working on important technologies like blockchain, financial inclusion, payment methods and others, would be good for their scaling development.With so many fintechs trying to be the next suitable collaborator by innovating in ways that are attractive to banks, they are becoming less and less a direct competition for the banks.The question is not whether fintechs will be able to grow big enough to knock banks off their pedestal — instead it is worth asking: are they now competing with fellow fintechs instead?Indeed, a recent study from Accenture and the Partnership Fund for New York City highlighted that banks and fintechs need to improve the way they collaborate."While financial institutions are moving to streamline internal processes, fintechs suggest they aren't as far along as they think they are", the report read, also adding that many fintechs see "competition with internal rivals" as a more pertinent issue than compliance or security concerns. It would appear that many banks looking to bring innovative firms into their internal ecosystem are putting too much emphasis on the wrong areas of improvement.As one of our interviewees pointed out during research for our fintech and banking report, banks need to be willing to fail fast instead of looking to implement everything perfectly — harbouring that mind-set could be key to any significant progress in the way banks/fintechs collaborate.FLUIDITY FOR FINTECHS — AND BANKSInterestingly, at the European Financial Forum (EFF) in Dublin Castle at the end of January, a panel discussion prompted a question to the audience regarding whether they would discard their incumbent bank in place of a newer fintech — a show of hands revealed that less than five percent of the conference hall of some several hundred people were in favour.It reiterates the fact that fintechs, by and large, will have a tough time replacing banks — indeed, it seems clear that their strategy has changed to focus on partnering. That said, there will always be exceptions to the norm, and Klarna, the fintech that self-identifies as a bank, is certainly one of them."We never use the word fintech internally...'bank' is our official title because it gives a sense of trust and credibility", Klarna's CCO Michael Rouse said at the EFF in Dublin.As pointed out by Mr Rouse that afternoon, many growing (and established) fintechs' greatest strengths are actually in their risk and compliance department — so much has been made of their weakness in this respect that many of them are starting to play against type and lead the way with KYC, biometrics and the like.Getting the balance perfect for both banks and fintechs will probably never work out — but banks need to realise that fintechs are still evolving and shape-shifting all the time. It would be wise for them to follow suit and be as fluid as possible when it comes to collaborating.

Shifting Sands

American consumer lending has led the world for decades, but, with global, regulatory and market eras coming to an end, the sands are shifting as never before.One thing is for certain: the market has lost none of its lustre, with start-ups, Big Tech and even investment banks reaching in with ambitions of taking ever bigger slices. The most striking example of Wall Street interest is Marcus, rustling up customers from a middle-class cohort hitherto unaddressed, at least directly, by owner Goldman Sachs through its long and storied history. The rise of Marcus has been swift: by the end of January, after five quarters in operation, the unit had already originated $2 billion dollars in loans (average amount: $15,000), and is currently on course for $13bn by the end of its third year in the marketplace. Starting out as a debt consolidation product (max $30,000), it soon added home improvement loans (max $40,000) and recently bought a small credit card start-up, called Final, which suggests that a credit card offering is also in the offing.But one catch is that the very consumer segment that Marcus is counting on has been sailing close to the wind — thus the credit cards in need of consolidation — and may well find it hard to keep up with monthly payments if economic conditions change. And interest rates can go up as well as down. Between April 1979 and March 1980, a span of eleven months, the Fed's key interest rate went up 9.75 percent: were anything like that to happen any time soon, tens of millions of Americans would be thrown into the deepest trouble of their financial lives. Conditions in the late 1970s were of course entirely different, with inflation much higher than now and Fed Chairman Paul Volcker called upon to steer the economy off the rocks of stagflation. However the authorities now may not have the control we have come to expect in a world of prolonged near-zero rates and quantitative easing: as commentator Josh Barro puts it, "maybe higher budget deficits mean we'll need higher interest rates, regardless of what central bankers are thinking." Indeed, some economists (Glenn Hubbard among them) have posited a causal link between budget deficits and pressure to increase interest rates. One compelling interpretation of the historic falls on the New York Stock Exchange last month (remember when the Dow Jones fell by 1,175 points on the first Monday, in the process breaking the all-time record for points shed in a single trading session?) is that investors contemplated life after the many years of near non-existent central bank interest rates.Whatever the mechanics involved, more expensive credit is bad news for consumers who are living from pay cheque to pay cheque. PayPal too has been fishing in these same waters, traditionally eschewed by more traditional financial institutions: "nearly half of PayPal's $6 billion of outstanding loans are to borrowers with credit scores below 680" American Banker noted recently. To be judged 'good', on this measure, a consumer has to reach 700.Ultimately the difficulty is that a salary in the United States, as in many other Western countries, simply does not go as far as it used to: for some, payment by credit card seems the only way to get by, but that is not a sustainable tactic. The latest results show that, per Financial Times analysis, "there has been a 20 percent jump in credit card losses sustained by the Big Four American retail banks in 2017 when compared to 2016 figures".Modern America is perennially faced with the issue of the sub-prime consumer and always will be as long as real wages lag behind economic output. Issuers and alternative lenders alike must be mindful of this increasingly pertinent reality.

Top of the wallet

When a card is referred to as 'top of wallet', that card is the first card reached for when a wallet is opened.Competition in this area has always been fierce, and as wallets become less physical and more virtual, the battle to be the chosen card is more intense than ever.'Pick me! Pick Me!'What makes a 'top of wallet' card? For some, it's an array of perks and bonuses: air-miles, concierge services, golf fees, insurance, rewards, toys, sweets; but not everyone can afford the JPMorgan Chase Palladium Visa (yes, it's made of real palladium, a rare metal, with a bit of gold thrown in for weight and etching). To the average customer, the favourite card is all about the look and the feel. It may sound childish but people like to own nice things; a customer receives a new card, maybe it comes in a special envelope, it looks impressive, feels impressive, even sounds good when it's dropped — that card is going top of the wallet.Most of us dress to impress when out in public. Whether it's the supermarket checkout or a special restaurant, no one wants to look bad, so handing over a card that elicits a response and may even start a conversation can only be a good thing, especially these days when people barely lift their eyes from a smart-screen. People like to show off the nice things that they have. Some days 'that's a nice card,' is the only compliment I'm likely to get. Most days actually.The design opportunityFor a designer, to make a card stand out from the masses is not an easy task. Size and shape is standard (based on ISO/IEC 7810): it has to fit the POS terminals and so on. On the back you need the magnetic strip, signature strip and the card security code. At the front: issuing bank logo, EMV chip, hologram, card number, network logo, expiration date, cardholder's name and the contactless chip. That doesn't leave a lot of room on the 85.60mm x 53.98mm stage for a designer to put on a show.Megan Anthony Bogard is manager of Design Services at the CPI Card Group, one of the top manufacturers of payment cards in the world, and she kindly shared her thoughts on the industry with Lafferty News. "The most stylish cards are made from a unique technique or material", she says. "For example, those that incorporate materials such as metal which add the tactile experience of weight and rigidity are very eye catching with a shiny chrome edge or a unique finish."Megan disagrees that the business lacks imagination when it comes to card design: "The industry doesn't lack a creative edge, but there are certainly trends and market demands that issuers follow. Over time, cards tend to show similar characteristics. This is why it is important to try new techniques including colour and treatments and take the risk of introducing something innovative and edgy in the market — it may start the next new trend."She believes that new technologies coupled with new materials, such as metal, are opening doors and allowing card manufacturers and issuers to push boundaries: "This kind of creative edge in innovation is imperative to grow", she says.The blank canvasMetal cards are becoming popular but isn't metal much more difficult to work with than plastic? Megan doesn't think so: "We look at metal as a blank canvas, aspiring to develop a metal card that could go beyond conventional perception. Focusing on the cardholder perspective of metal cards and the sound they make when dropped on a table inspired us to create designs from fused metal and PVC that are heavy, yet cost-efficient, sleek and visually compelling. These cards are also highly customisable and design-friendly — capable of leveraging everything from high-definition print capabilities and silkscreen treatments to laser personalisation and Drop-on-Demand (DOD) personalisation."I asked her, if she could design any card she wanted, what it might look like. "I would probably choose a precious metal card body such as a platinum or perhaps something as simple as copper, for the tactile experience and the look of laser etching. To this I would add contrast with a shiny to matte finish and a pop of colour, perhaps incorporating a treatment to enhance and colorise a design on the metal."But PVC and metal are not the only card materials the CPI Group have researched in their twenty year history. Megan told me that cards can be produced from recycled material (PVC made with 25 percent to 100 percent recycled content), PLA (PVC made from 100 percent renewable resources such as corn), wood (made from 95 percent unaltered organic plant material) and BioPVC (certified as fully biodegradable and environmentally safe).And the good news is, an impressive card doesn't need to cost a fortune to produce: "A card design that uses specialty treatments in an efficient manner can result in a showstopping card design that stays in budget", says Megan. "The use of metallics, silkscreen inks, and foils can be a great way to accentuate a beautiful card design."You can read much more about this topic in Lafferty's Bank Design report to be published in July.

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