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Can you tell me...

How to find the right fintechs for the right objectives in treasury?


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Everything is becoming digital. Everything is getting faster, better, cheaper. Fintechs are conquering the (financial) world. And they're doing it now. Right now. This is the impression you inevitably get if you follow the specialist press, the relevant associations and groups, Twitter or any other form of analogue or digital media. And it is not rare for treasurers to express their unease that, in an apparent contrast to many of their colleagues, they're not yet working together with the most happening fintechs. It's a bit like 'Everyone in my class has an iPad apart from me'.

Let's first be clear: not every software company that offers solutions for treasury is a fintech. Without going deep into the definition of financial technology (fintech), a short explanation: it is a collective term for technologically advanced financial innovations that result in financial instruments, services or intermediaries. If you follow this definition further, you see it covers sectors (e.g. banks, insurers), applications (payment, investing, hedging), customer segments (e.g. retail banking, corporate banking), means of interaction (B2B, B2C, C2C) and positioning (e.g. as bank or non-bank).

Fintechs differ from established financial service providers in how they behave, especially because of their:

  • speed and efficiency: Fintechs use a number of technologies (e.g. real-time updates, mobile connectivity) that speed up and improve access to the financial services (products)
  • new business models: Fintechs are quicker to exploit new market conditions and develop new business models based on these new conditions. For example, since the announcement of PSD II, some fintechs have emerged that have developed innovative services in the field of payments.
  • agility: Fintechs are not weighed down by IT inventory and/or high administrative costs and thus can offer their services cheaper than traditional financial services providers.
  • transparency: In contrast to many financial services providers, fintechs focus on the transparency of their services (e.g. price formation of options).

Fintech monopoly...

The winner-takes-all principle of the internet economy applies also to fintechs. How else could you explain around USD 100 billion having been invested in fintechs since 2010, with around USD 72 billion of that since 2015? 

In Germany alone, there are currently around 300 active fintechs. If you see this broken down by sphere, it becomes clear that they won't all be able to survive. And that's without even taking into account the competition from global players from the USA and Asia, who operate according to the winner-takes-all maxim. How about an example? In how many currencies does your company do business today? Are you ready to add another 100 cryptocurrencies?

Trust in the financial sector is a valuable asset that develops slowly until it has reached an acceptable level for customers. Accordingly, it is hard for fintechs to penetrate areas in which trust is of great importance, in particular for companies. And this applies particularly if the fintech is not (yet) subject to market regulation. Moreover, customer access is highly valued as regards margin, since with direct access to the end customer, the margin is not reduced by other parties being involved. Private and corporate customers are generally very loyal to their financial services providers. Even if PSD II means that the cards are being reshuffled in the fight for customer access, it will hold true for the majority of fintechs that 'incumbents that don’t seek to partner will die'. (Mike Sigal). On the other hand, this means that companies, especially, should look very carefully at whom they want to work with as far as financial service providers or fintechs are concerned.

What are the hot topics?

Let's shed some light on the matter.

With all the hype surrounding digitalisation or fintechs, the basic rule still applies: return on investment, with risk factors taken into account, should be higher than the investment itself.

That said, it's worth looking at the financial supply chain and considering in which process step specific added value can be gained via the services of a fintech: from trade enablement (with whom, on what basis, under what conditions I want to do business), to financing, to payment transactions. Where can throughput speeds be increased with process automation, process costs reduced, the 'middleman' and his fees cut out, or where can transparency be created and with it competitiveness?

If using fintechs generates commensurate returns, the fintechs can then be allocated accordingly to each of the steps in the financial supply chain or sub-segments of the technical backbone.

Considering that a great deal of fintechs will disappear from the market as quickly as they arrived (as pointed out above), it is particularly important that they are integrated into systems and processes. The outlay and the expected interdependencies with other processes and systems become important when it can be assumed after a relatively short period of time that the wheel must be turned back or further developed – either because the fintech disappears, the expected returns don't materialise or a new, better competitor has entered the stage. This potential failure applies not just for the fintechs but also for their customers. Are treasurers ready for this?

Fintechs are not a sensible idea for treasury simply by their definition – rather, the utilisation of solutions that fintechs offer must be embedded in the treasury's target system. Depending on the corporates structure, on the level of homogeneity of the business model or on how the company is managed, this target system may be extremely complex and involve numerous parameters and restrictions. One of the most important restrictions is resources, both financial and human. Whereas you may wonder if the financial restrictions can't be removed smoothly according to the formula of economy as noted above, this is not easily doable in terms of personnel capacity – not even fully through external resources such as consultants!

For this reason it is unsurprising that the areas in which fintechs in the narrower sense are currently being used are the same areas that are on the agenda for treasury in terms of digital transformation: payment transactions, currency management and financing. While process and transaction costs and security are the focus for payment transactions, priorities in currency management concern market transparency and competition, and financing seeks to eliminate the middleman (i.e. the bank).

This article concludes with an interesting example that shows that it's not just about which fintechs develop, how they develop and what they become, but also that established serviced providers are innovating and are competing with fintechs: Ripple vs. SWIFT. While the outlook was superb for Ripple as service provider for payment transactions in real time, and especially as a solution to the problem of verifiability of cross-border payment via correspondent banks, things are again looking different following the introduction of SWIFT GPI. The gap has shrunk once more, although Ripple's technical advantage due to its blockchain technology remains. How will the race finish? Maybe something like 'First they fought, then they fell in love'. Wedding not ruled out. Who knows...

Source: KPMG Corporate Treasury News, Edition 80, May 2018
Author: Carsten Jäkel, Partner, Finance Advisory,

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