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September 12, 2016

How Banks and FinTech Start-Ups Can Work Together

Posted by Dennis Gada (View Profile | View All Posts) at 5:16 AM

How Can Banks and FinTech Start-Ups Work Together

Ever after the global economic crisis of a decade ago, the world's largest banks have continued operating much like they always have because of the belief that they were "too big to fail." Governments for the most part seemed to go along with this reasoning. Then came the rise of the financial technology start-ups.

One can compellingly argue, that FinTechs grew so fast and offered such innovative and groundbreaking products and solutions simply because of the vacuum that existed from 'banking-as-usual'. If there is one thing the world's consumer's desire, it is a new and more convenient way by which they can use digital devices to pay for goods and services. My favorite example of this completely new paradigm involves telecommunications companies, which realized that they controlled an infrastructure that could not only be used for telephone calls but for financial transactions as well.

Enter the M-Pesa, a mobile money platform created by Vodafone for Africa based mobile communications company Vodacom and Kenya-based Safaricom. The entire premise of the M-Pesa is that people in emerging and frontier markets, who don't have bank accounts, can use the platform via their mobile phones to make payments and facilitate money transfers. By some estimates, nearly 43 percent of the gross domestic product of Kenya takes place on the M-Pesa platform. The success of the platform can be seen from another perspective: entire businesses have arisen because of the ability of the consumer base to move money around.

Global banks are now waking up to the economy going digital and the ability of FinTech startups to develop innovative disruptive solutions for consumers to move money. To counter this trend, a consortium of some of the world's largest banks recently announced they were dusting off a project known as clearXchange. Although it has existed for about five years, the consortium is moving forward as a way to counter the serious challenge posed by the rise of FinTech start-ups.

The attraction of clearXchange is that consumers can use the platform to make real-time payments instead of the traditional method of waiting for payments to clear. Not to be outmaneuvered, the digital payment app PayPal announced that it is now working with credit card company Visa to allow consumers who use both the PayPal and Venmo apps to access money transfers in an instant. What's most interesting about this new battle for the hearts (and wallets) of banking consumers is that the large global banks have set aside fierce, old rivalries in order to make clearXchange work. That means a Wells Fargo customer can use clearXchange to transfer funds instantly into a Bank of America account. No middleman. No clearinghouse. No waiting.

But the real challenge before large banks is whether they should continue to work in isolation, consolidating their strengths internally or whether they can realize near and long-term value in partnering with FinTech start-ups. The opportunities are huge, and a partnership of this nature could create a new global payment system.

The trend is not too easy to spot. Younger, more digitally savvy consumers are increasingly demanding person-to-person payments. So much so that the most traditional banks are taking notice. Add in the plethora of FinTech firms and even telecom companies that are innovating new ways to make payments possible for their consumers, and you will realize that we are seeing the birth of a new, global system of finance.

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