In today’s world, new types of financial service providers are constantly emerging; it is no longer a domain limited to financial institutions such as banks and insurance companies. In addition, both startups and financial service providers are now realizing that it might be in their best interest to cooperate rather than compete.

Since Israeli FinTech startups are primarily B2B, they can potentially shine in this new global FinTech ecosystem, which embraces partnerships and encompasses new types of corporations that provide financial services.

Not just financial institutions

Over the past few years, many have tried to describe and define FinTech. While some attempts were fairly successful – since FinTech solutions were primarily attributed to new technologies implemented by financial institutions – today, this narrow definition is no longer suitable.

The previous narrow definition of FinTech has expanded thanks to the diversification of financial service providers. In today’s world, financial services can be offered by virtually unlimited types of third-party providers, often with more efficiency than traditional financial institutions. For example, e-commerce companies such as Alibaba and Amazon, and transportation companies such as Uber, have already proven to be able to utilize their brand, massive client base and large number of employees to offer services previously provided by banks.

For example, Uber recently introduced a real-time earning feature, where instead of waiting for their weekly payments, drivers and couriers enjoy real-time access to their earnings. In addition, Uber’s debit card users can now enjoy cash back rewards. Retail giant Amazon now allows customers to pay their utility bills, a feature that may give them cash back rewards and will also allow easy voice interaction through Alexa. These examples show that it is no longer possible to associate FinTech with a specific type of corporation.

With technology advancements and regulatory changes such as open banking, who knows what the future holds? The day is not far off that we can find ourselves having a global bank account with Google and transferring cross-border payments through Facebook.

FinTech is everywhere

Today, it is unclear which technologies fall under the FinTech umbrella. Should a startup that develops a face-recognition sensor be considered FinTech? What about a startup that can examine machine learning models? Well, if the sensor is used to authenticate individuals as part of anti-money laundering processes, and if the machine-learning model is utilized to prevent biased financial decisions, then the answer should probably be yes. This means that many technologies previously associated with other industries, are now part of the FinTech ecosystem.

With more than 6,000 startups, the Israeli ecosystem has excellent examples for the different solutions that can be applied to financial services; Anagog is one of them. The company’s solution is designed to allow banks to provide personal and contextual services to their customer; it also lets insurance companies tailor a more personalized insurance policy for each of their clients.

Another example is Israeli startup AnyVision. The company’s computer vision solution specializes in face, body, and object-recognition software, and can be utilized by financial institutions to prevent various types of fraudulent activities. Cross-sector solutions such as these may become even more valuable for the FinTech ecosystem, when considering the aforementioned blurring of the definition of financial service providers.

From competitors to partners

A few years ago, observers referred to FinTech as a threat to traditional financial institutions. FinTech companies were regarded as potential competitors trying to snag their share of the market. Today this is clearly not the case.

While there are many FinTech companies that offer competing financial services, financial institutions have realized that FinTech solutions have the potential to increase their own market share by reaching new customers (e.g. the unbanked population), to polish their brand and offerings, and to help with overall efficiency and cost reduction.

FinTech companies have also realized that competing with these huge, well-funded, highly experienced financial institutions is not necessarily the right way to go. Instead, partnering with the right bank or insurance company can help startups meet regulatory requirements, have sufficient equity and provide better services.

Most neobanks (digital banks with no branches) for example, including Israel’s only digital bank Pepper, are actually using another bank’s license. This is also common with InsurTech startups. Next Insurance currently has sufficient funds and experience to operate as an autonomous insurance carrier, but when it was established in 2016, it was based on an MGA model (with a licensed insurer) in order to meet certain regulatory thresholds.

Instead of trying to reach millions of individual customers, a FinTech company like Personetics, which focuses on predictive digital banking, can sell its solutions to banks, and by that reach millions of customers. In turn, the bank enjoys an innovative product that offers AI-powered, personalized digital banking services to support customers and improve retention.

 finance

Financial institutions are not only competitors or supporting partners, they can also be clients. With the realization by banks that they can and need to utilize technology developed elsewhere, a door was opened to FinTech companies to offer their solutions as vendors.

The transition to a partnership model is certainly a current global trend, but the Israeli FinTech ecosystem is already there. Approximately 80% of Israeli FinTech startups already offer B2B services. Since most Israeli startups are aiming globally, they have realized that engaging large financial service providers may allow them easier and faster access to foreign markets. The startups that do wish to operate in Israel, might find it challenging operating a B2C model due to the country’s highly concentrated financial market and regulatory barriers.

Breaking the glass ceiling

While B2C companies can target an almost unlimited client base, B2B companies face a defined number of potential clients as the population grows faster than the number of financial institutions. Israel’s population has grown by 5 million people over the past 40 years, while the number of banks has declined as some have merged and the number of new banking licenses issued has only grown by one.

But with large global corporations penetrating the market as new financial service providers, FinTech companies and financial institutions have new potential partners and clients.

Analyst Yair Fonarov is Start-Up Nation Central’s FinTech Sector Lead. He researches Israeli innovation and global market activity relating to the FinTech industry, providing knowledge and insights to Start-Up Nation Central, the Israeli FinTech ecosystem, and its global partners. Previously, Yair worked at Herzog Fox Neeman (HFN), KPMG Israel’s FAS department, Deloitte Israel’s FAS department and at Clal Insurance’s investment division. An attorney and CPA, Yair holds a BA degree in accounting and a law degree from Tel Aviv University.

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