In order to accelerate their revenue and cost transformation agendas, Australian banks will need to create the capacity to invest and innovate in their core operations, and one strategic pathway is to increase their focus on identifying and executing fintech partnerships.
KPMG’s analysis in our recent Major Australian Banks Results Analysis reports shows that the Majors in aggregate have been allocating a reduced proportion of their capital budgets to transformation programs – this is a direct result of the increased investment in risk and compliance, in the aftermath of the Hayne Royal Commission. This trend away from transformation investment is exacerbated by the banks’ reduced profitability, and therefore their ability to invest.
Given that the larger banks have more complex operating models, organisational structures and systems, it can be challenging to compete with emerging, nimble challengers with simple models, focussed (often monoline) product offerings and a more seamless customer experience that is unencumbered from legacy systems, processes and compliance undertakings.
In recognition of these issues, partnering with fintechs to accelerate innovation has become an increasingly adopted strategy for global banks, a trend we are now starting to see emerge in the local financial services landscape.
The partner path seeks to give the bank access to the fintech’s products, channels or processes to deliver the innovation, in replacement, or addition of, the existing business. This can be an efficient way to go-to-market, for example to introduce digital mortgages when the bank’s origination platform is outdated and still highly manual in nature.
Other examples include compliance with regulatory requirements (e.g. Open Banking), the introduction of automated credit decisioning or the use of Artificial Intelligence (AI) in back office processes.
Tic:Toc was established in 2017 with the aim of automating the mortgage application and approval process. Bendigo and Adelaide Bank became a partner and cornerstone shareholder early on, and more recently launched Bendigo Express, a fast online mortgage product with automated approval that is powered by Tic:Toc’s technology and processes.
This partner pathway aims to let the bank fill in product gaps or enter new product categories, through a partnership with a fintech that already has a product presence in the target market.
Joining up with challengers can be the best way to compete – an example of this is banks partnering with Buy-Now-Pay-Later (BNPL) platforms, to introduce their own BNPL product. Other examples include partnering with personal financial management (PFM) fintechs, peer-to-peer (P2P) platforms or business cashflow lenders.
CBA announced an initial investment in Swedish headquartered BNPL provider Klarna in 2019. The initial investment (and subsequent investment in January 2020, totalling circa US$300 million) secured an exclusive partnership between CBA and Klarna in Australia and New Zealand, and CBA subsequently rolled out Klarna’s product suite through its own banking applications.
This approach to partnering looks to leverage a fintech’s capabilities to create entirely new business models or business model extensions for the bank. This is the most disruptive of the three pathways and can apply in situations where the bank needs to pivot quickly and transform its business and operating model. Typically, the aim is to open up new opportunities in the bank’s existing markets.
A clear example of this is the bank entering into offering banking-as-a-service for third parties, through the partnership with (cloud-based and innovative) banking system providers. Partnering with the same banking platforms to establish a new digital bank is another example.
In 2019, Westpac announced it was partnering up with UK-based cloud-native banking technology provider 10x Future Technologies to build a standalone digital banking-as-a-service platform. Once delivered, the platform would essentially enable businesses (e.g. fintechs like AfterPay) without a banking licence to deliver banking services from Westpac via APIs, something that would be cost-prohibitive with Westpac’s existing banking and operating platform.
Fintech partnerships are not the answer to every banks’ challenges. Partnering is only really required in areas where the banks existing core can’t deliver on the growth and transformation objectives.
Banks should be selective in which areas of their business they use partnerships to accelerate go-to-market opportunities. Where fintech partnerships are the clear answer, the three pathways above have several benefits in common:
There are clear benefits for banks to partner with fintechs and technology partners to drive revenue growth or cost improvements – they can access opportunities for earnings growth more quickly, cheaply and with less risks. It is imperative that the banks consider where in their business and operating models they would benefit from partnering with fintechs rather than continuing to exclusively build in-house or limit their vendor community to traditional providers.
This article is part of KPMG's Major Australian Banks: Full Year 2020 Results Analysis.
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