How Do Banks Interact with Fintech? Discussant: Mr. Hornuf Date: 25 March 2020 Motivation - Introduction - Financial industry spent large sums on information technology (Scott et al., 2017) - Banks perceived as least innovative - Fintech reshape and crowd out business models of banks - Banks engage in strategic alliances with newcomers This Paper - We investigate • The extent to which banks interact with fintech • Different forms of interactions • What drives banks to engage in strategic alliances - including minority or majority investments - with fintech • The impact of strategic alliances on bank value Preview of Findings - Implementation of a digitalization strategy or employment of a Chief Digital Officer by banks has a positive effect on alliances with fintech - Large banks more willing to engage financially in fintech firms; banks more likely to invest in small rather than large fintech - Announcements of alliances have negative effect on bank value; digital banks benefit from alliances Literature and Hypotheses Literature - Academic literature on fintech still scarce • Puschmann (2017) categorizes the industry • Haddad & Hornuf (2018) study determinants of fintech formations • Cumming & Schwienbacher (2018) study fintech venture capital • Navaretti et al. (2017) run a conceptual analysis on bank-fintech alliances Hypotheses - Alliances mutually beneficial transactions between banks and fintech - H1: CDO and digitalization strategy ceteris paribus increase banks' propensity to engage in an alliance with a fintech - H2A: Large banks more likely to acquire fintech startups; small banks engage in product-related collaborations • Large banks have deeper pockets and take the risk of an acquisition • Banks specialize in IT services to corporate clients, e.g. solarisBank → API banking, BaaP and Baa - H2B: Banks more likely to invest in small rather than large fintech • Innovations of early-stage firms difficult to contract, because ultimate outcome hard to determine ex ante and non-verifiable ex post (Aghion and Bolton, 1992) • Larger fintech have their own distribution channel and end-user base → less synergies through acquisition Data - Hundred largest banks respectively in Canada, France, Germany, and the United Kingdom from 2007 to 2017 - Hand-collected information on strategic alliances and CDOs from annual reports - Hand-collected information on 500 bank-fintech alliances from bank websites, Crunchbase and news articles on Factiva - Control variables such as bank is listed, universal bank, bank total assets and ROAA from Fitch Connect database and annual reports Outlook Duration of Alliances - Out of 500 alliances we could track the duration for 150 alliances (115 direct responses and 35 from Factiva) - In 25 cases the alliance was terminated; mostly by the bank - Common reasons: • Bank developed own technical solution • FinTech was sold to competitor or went insolvent • End of contract or accelerator program • Change in bank strategy Summary - Implementation of digitalization strategy by banks or employment of a Chief Digital Officer have positive effect on alliances with fintech - Large banks more willing to engage financially in fintech firms; banks more likely to invest in small rather than large fintech right step? - Announcements of alliances have negative effect on bank's value; digital banks benefit from alliances → apparently not for all banks.