How do banks interact with fintech startups?

Abstract

The increasing pervasiveness of technology-driven firms that offer financial services has led to growing pressure on traditional banks to modernize their core business activities and services. Many banks tackle the challenges of digitalization by cooperating with startup firms that offer technology-driven financial services and novel service packages (fintechs). In this article, we examine which banks typically collaborate with fintechs, how intensely they do so, and which form of alliance they prefer. Using hand-collected data covering the largest banks from Canada, France, Germany, and the United Kingdom, we provide detailed evidence on the different forms of alliances occurring in practice. We show that banks are significantly more likely to form alliances with fintechs when they pursue a well-defined digital strategy and/or employ a chief digital officer. Moreover, in line with incomplete contract theory, we find that banks more frequently invest in small fintechs but often build product-related collaborations with larger fintechs.

Ecosystem dynamics: exploring the interplay within fintech entrepreneurial ecosystems

“…Hence, the digital economy provides numerous opportunities for newcomers to innovate and potentially challenge established institutions in the targeted sectors (Gazel & Schwienbacher, 2020). The financial sector offers a good example of how digitalization has enabled fintech newcomers to aggressively penetrate the market, forcing traditional financial institutions (FIs) to become more open to market engagement through strategic alliances or incubation programs (Hornuf et al, 2020). According to PwC, 88% of incumbents are concerned about losing revenue to fintech entrants, whereas 82% expect an increase in partnerships with fintechs in the next 3 to 5 years (PwC, 2017).…”

“…This is not to overlook academic contributions on niche fintech segments such as initial coin offerings (ICOs) or crowdfunding (e.g., Adhami et al, 2018;Vismara, 2016). Rather, there is a need for more studies that explore fintech as a phenomenon capturing a broader range of technology-powered financial service providers (e.g., Gazel & Schwienbacher, 2020;Haddad & Hornuf, 2019;Hornuf et al, 2020). This is particularly important when fintech innovations (e.g., crowdfunding or ICOs) complement the growth of other fintech segments in ways like raising capital.…”

“…In addition to the effect of digitalization on the identification and acquisition of entrepreneurial opportunities (Autio et al, 2018), fintech is characterized by the proliferation of newcomers, financial stability risks (Anagnostopoulos, 2018;Li et al, 2020;Magnuson, 2018), and changes in the regulatory environment (Arner et al, 2015). These characteristics challenge and reshape the existing dynamics among ecosystem actors (Gazel & Schwienbacher, 2020;Haddad & Hornuf, 2019;Hornuf et al, 2020).…”

“…The Monetary Authority of Singapore (MAS) reported the presence of 1100 fintech firms in 2019, compared to fewer than 100 in 2016 (MAS, 2020b). Additionally, 2019 saw 1 While some studies have investigated selected fintech innovations like equity-based crowdfunding and its related regulatory environment () or ecosystem (Cummings et al, 2020), we explore fintech as a collective phenomenon encompassing different financial innovations (Gazel and Schwienbacher, 2020;Haddad & Hornuf, 2019;Hornuf et al, 2020). 2 While acknowledging that EEs are characterized as nested geographies hosting smaller ecosystems inside larger ones (e.g., Brown & Mason, 2017), we elect to conceptualize the EE as a single ecosystem, following similar investigations of the fintech ecosystem (e.g., Lee & Shin, 2018;Palmié et al, 2019).…”

“…On this basis, we narrow our investigation to the financial sector due to the proliferation of market participants, associated risks to financial stability, changes in the regulatory environment, and other contextual conditions such as access to infrastructure, talent, and capital. Taken together, these factors challenge the existing dynamics among key ecosystem actors and consequently the creation and growth of new fintech ventures (Gazel & Schwienbacher, 2020;Hornuf et al, 2020;Svensson et al, 2019). The next section describes the complex fintech landscape.…”