Growing through external growth in fintechs » PACA’s economic and political newsletter

Karim Jouini, CEOExpense.

For a small structure, growing through external growth can be considered a complex process and is often reserved for large groups. The lack of understanding that causes the startup to be deprived of real development opportunities. For ambitious SMEs, external growth is a very effective growth tool.

External growth refers to all operations undertaken by a company with the aim of approaching other businesses, for example through acquisitions or mergers. In the fintech space and with the need to reach a critical scale, the golden opportunity for these innovative start-ups should be seized. What is the role of fintechs in the financial sector and especially in banks? And how can fintechs leverage the inertia of financial institutions to fuel their growth?

Fintechs: the Eldorado of the financial sector!

With the digital transition experienced in recent years, several startups have emerged. They have become more flexible, innovative and technologically advanced. Fintech refers to technology companies that challenge historical players in finance and banking by offering innovative and fully digitized financial services.

Although they emerged a few years ago, fintechs have grown exponentially in recent years. $105 billion is the amount of investment in fintechs in 2020, a year of crisis for many sectors. This development has been possible for several reasons, such as the increasing public demand for digital solutions and the evolution of digital data storage and processing with the democratization of the cloud and open data, which allows for widespread use of data.

Fintech VS traditional banking

In their early days, fintech companies were perceived as a threat by traditional banks due to their many advantages for the user, such as the integration of new technologies, simplified customer service and the flexibility of online services.

In terms of innovation, traditional banks lag behind with archaic and often complicated procedures. The current regulatory framework and processes mean that they cannot keep up with changes quickly and therefore do not adopt new technologies in a timely manner.

Making financial processes more accessible to people, especially young people and millennials, fintech works with leaner operating models devoid of the complications associated with legacy systems. Moreover, fintech can directly violate unfavorable regulations. Thanks to a flat organizational structure, fintechs have an easier time changing their processes, innovating and reviewing outdated systems.

Fintech is flexible and works virtually, it is accessible to the consumer, so there is no need for more travel and meetings. Access to financial services is more accessible: fintech offers access at any time, 24 hours a day, 7 days a week, whether on a computer or through a mobile app. Fintech players have a motto that allows them to grow exponentially: leading where banks lag!

Fintech and the financial sector: from competition to partnership

With the increasing number of fintechs already operating in the financial sector, consolidation is gradually taking place. If they are more nimble than historical players in the financial sector, they don’t announce their downturns. Fintechs have started a movement of change and are having a serious impact on their operations. That’s why several financial institutions are making these innovative startups allies rather than enemies.

A study by CGI confirms that 73% of 111 retail bank executives surveyed are looking to invest in fintech partnerships. Banks and fintechs have several opportunities to collaborate. The advantage of banks is that they already have a certain reputation, an image formed over the years and the trust of their customers. Fintech startups, on the other hand, play in innovation, customer experience and the right use of data. Banking products are not sufficiently responsive to the digital age and even less responsive to the connected generation, cooperation with fintech then becomes more evident.

Société Générale is the first French banking organization to partner with fintech with the acquisition of Fiducéo in 2015. Added to this was an equity investment in TagPay, the acquisition of Lumo and a stake in Reezocar in 2018. It continues to strengthen its interactions with startups in France and internationally, such as Treezor. BNP Paribas recently enriched its offer with a complete solution for the management of expense reports as well as corporate cards in collaboration with a French-Tunisian fintech company specialized in professional expense management. This partnership allowed it to gain access to a new market that has not yet been introduced and to benefit from advanced experience in terms of technologies and security.

More and more fintechs are leveraging the investment power and infrastructure of traditional banks. It’s a real gold mine for innovative companies to test and implement their innovations and scale them up. For the mutual enrichment of cooperation, it is necessary to ensure adequacy between financial technologies and the projects they respond to.

Cooperation with startups is a give-and-take solution that allows players in the financial sector to offer new services and startups to grow. According to a study by Truffle Capital and Finance Innovation, 86% of French finance and insurance startups have partnered with large companies, including 54% with banks. Partnerships are a Win-Win alternative for SMEs and VSEs to avoid competing with large groups that often struggle to adapt to technological changes.

Leave a Reply

Your email address will not be published. Required fields are marked *