By Nick Parminter
The prevailing narrative in the corporate innovation bull market of the last 12 years was that “you can’t cut your way to growth”. This prompted a series of Hail Mary attempts at innovation. Often newly anointed innovation teams, working away from the mothership, sat in labs spinning up new ideas and trying to develop them further - often within expensive failed experiments.
Few companies were less profligate than the banks when it came to placing big ets. Almost every high street bank made high profile attempts to invent new products and services, often mimicking the challengers of which they were becoming increasingly scared, as the Atoms, Monzos and Starlings started an avalanche of new competition - RBS’s Bo & Mettle and HSBC’s Kinetic being the ones that got to market, along with many from other banks that didn’t.
Recent narrative has shifted. We are squarely, deeply, and undeniably in a recession. The Ukrainian war, the economic symptoms of Brexit and the macroeconomic sensory scramble of figuring out what a “post pandemic normal” looks like, have conspired to create a heady mix of low growth, high inflation, high interest and structural instability. This mix has also caused a sudden (if overdue) thesis shift for VCs - from scale first, monetise later, to unit economics first, scale later. The result of which is a discombobulated, uncertain and painful start to 2023 for those involved in the fintech value chain - the challenger products trying to win customers profitably, the infrastructure as a service platforms that facilitate them, and the advisory firms helping them to win (sadly for us).
Like many of their fintech founders, the fintech industry in its current incarnation hasn’t seen a recession before. It grew up on free money, an obsession with software economics, free spending consumers and SME regulatory protectionism - and this particular bubble has now burst. The evidence of which can be felt in every “right-sizing” activity on record - almost everyone in the value chain is cutting headcounts (generally 5-15%), focusing strategies and making their runway last longer - with an attached narrative about overoptimism on the new normal. Starve a recession, feed a pandemic.
This new environment has very much shifted the power back to banks (although most, including me, would argue they never really lost it). Sitting on very strong balance sheets and long term committed loans (including mortgages), and with interest rates on the rise, they are firmly the chip leaders in this game of fintech poker. This begs the question, are we entering the fifth era of the fintech revolution: Chip Leadership?
Chapter 1 (pre 2008 ): Pre-GFC digital service innovation
Banks adopt technology to enhance their service - ATMs, Payment Rails, Online Banking, Mobile Banking whilst consolidating their market position via M&A.
Chapter 2 (2008-2012): The great sell-off
European Commission enforced sell offs and divestments, stripping some of the shiniest but least core service lines (insurance, merchant services) and some branches. Cost pressures result in branch closures, driving a need for digital innovation.
Chapter 3 (2012-2018): Challenger copycatting
Banks respond to the threat of neobanks by replicating their experience-led approach, never fully reversing into the mothership, and leaving expensive bets to wither on the vine.
Chapter 4 (2018-2022): Co-opetition
Banks partner with fintech enablers (like neo-core banking) to create new value, new ways of working and sometimes new brands in market (e.g. Chase, Lloyds Sandbox)
Chapter 5 (2023-?): Chip leadership?
With the balance of power shifting from venture to banks, will banks adopt a new predatory position?
Fintech has not been immune to the significant reduction in both new raises and valuations over the second half of last year. According to CBInsights, Series D and later funding rounds saw valuations fall by 27 per cent in the third quarter of the year, bringing them down to nearly 2020 valuation levels.
The significance of this pinch being felt at later stage ventures is twofold: First, exit options are limited - the path to realising value via IPO is less of a surething. Second, most ventures at this scale have proven significant traction, but not yet reached financial independence.
In other words, banks that have spent billions on digital transformation or on launching new products and services - unsuccessfully - have the chance to buy an asset that has done a lot of the legwork in either creating great technology, or acquiring a lot of customers - or both. Rather than spend hundreds of millions on projects (I know of one financial institution that measures their tech fails in terms of buildings - “We wasted a Shard on that project”) to make them more like startups, they can spend the same on taking the threat out of the market.
And fintechs that have built good technology and product offers, and amassed good customer penetration, but become addicted to fundraising and are running out of runway, have a chance to continue their quest with all of the distribution, operational backbone and surety of being within a regulated bank.
Whichever bank does this first and well (my money is on NatWest) will transform, digitally, without a Gartner Magic Quadrant or billion dollar IT bill in sight.