The rise of next generation FinTech (financial technology) companies will trigger a wholesale restructuring of the banking sector, according to tech M&A advisory firm Magister Advisors.
Key to survival will be the Banks’ adoption of the restructuring model applied by telecoms companies, dividing into ‘NetCos’, responsible for the underlying operation, and ‘ServCos’, concerned with service provision to customers.
Victor Basta, managing partner at Magister Advisors, said: “Banks can survive, maybe even prosper, by proactively focusing on becoming world-class ‘NetCos’, standing behind and supporting thousands of ‘ServCo’ FinTech startups out-innovating each other for customers’ wallet-share across a wide range of financial transactions. Banks that become ‘NetCos’ could become the spade sellers arming a thousand gold-digging ‘ServCos’, which is a great and safe way to generate high, repeatable margins.”
The Global financial crisis of 2008 changed banks dramatically. Retail banking and investment banking separated, or were forcibly separated, to bolster against the risk of repetition. Since then, banks have begun to face an even more profound threat; a wave of well funded international tech innovators focused on customer experience. Much of the new innovation, with its emphasis on mobile, is making traditional banking practices look archaic. According to analysis by Magister Advisors, more than $10 billion of venture capital has poured into FinTech startups in recent years representing unprecedented investment weaponry directed squarely at traditional banks.
Victor Basta added: “The parallels with the changes that have taken place in the telecoms industry are striking. The third great utility, telecoms, yielded to similar pressures, with many telcos splitting their operations between infrastructure and customer service – the so-called NetCo and ServCo divide.”
“Our view is that banking could go the same way. A bank focusing on becoming a NetCo behaves fundamentally differently. No longer is customer ownership and control the primary driver. It is simply not possible for banks to innovate as quickly, and with as much marketing ‘flair,’ as tech-based growth companies. And banks simply cannot afford to devote the capital required to out-spend innovators and win with financial brute-force.”
In Magister Advisors’ view, retreating to a NetCo would mean banks become transaction hubs and processors, providing a mature and trusted infrastructure that enables all the new FinTech innovators to scale fast. In turn, the innovators would take over much of the ServCo market, engaging with customers, dealing with churn headaches, and trying to leapfrog each others’ innovations. At the same time, NetCo banks could potentially increase margins through aggressive use of BitCoin / blockchain technology.
Victor Basta added: “We can imagine a time in the not too distant future where the blockchain approach effectively and dramatically cuts clearing and settlement costs, enabling banks to capture far more of the margin which they now have to give away to legacy clearers. By retreating to a wholesale NetCo model enhanced where possible by near zero-cost blockchain architectures, banks can become more profitable, and less risky, long-term bets.”
