Speaker 1: I think the bank industry is doing exactly what they should do, try to keep the fintechs close, learn from them, find out what works, what doesn't work.

Speaker 2: Hello and welcome back to the Bankers Masterclass series in association with Saxo Payments, looking at how banks can use utility banking to drive forward innovation in financial services. I'm Joy McKnight, Deputy Editor of The Banker, and I'm joined by Anders Lacour, Co-Founder and CEO of Saxo Payments. In Chapter 3, we're looking at digital transformation in the banking industry, spurred on by new entrants. Thank you so much for joining us today, Anders. Thank you. So can you tell me why banks are really interested in collaborating with fintechs?

Speaker 1: We have now reached the point where the banking industry is fully aware that the changes in the market are going to happen. And I think if you speak of the Netflix moment, which we talked about in one of the previous sessions, I think the banking industry is much better prepared for that change than other industries that have been hit by a Netflix moment has been. In that respect, I think the banking industry is doing exactly what they should do, try to keep the fintechs close, learn from them, find out what works, what doesn't work, and then literally taking the best of what they can and try to use it in their own business model. I think you can see that both from the fact that banks are trying to set up specific programs for working with fintechs. They are setting up venture capital pools to do separate investments in fintechs. And we've even seen the first takeover of a new payment gateway in the US where JP Morgan Chase recently acquired WePay. So I think they're doing a lot to ensure that they stay very close to the fintechs to actually get inspired from them.

Speaker 2: But that's very well for some of the very large banks, but what sort of challenges do the smaller banks face when trying to engage with the fintechs, especially when you have this massive explosion of many different fintechs?

Speaker 1: It's a very, very good question because the smaller banks in general, at least those that do not have scale to spend a lot of resources in the digital market, will face a lot of challenges over the coming years. They'll face pressure from the larger correspondent banks, they'll face pressure from the fintechs that are operating in their core domestic environment, and they'll face pressure from the big techs like Amazon and Facebook that will also move into this space. And I think that these challenges will even be bigger due to the fact that they will not be able to set up a huge fintech program and invest millions of dollars in that. So definitely there will be some challenges. I'm quite sure they can overcome it with the right strategy, but they will face challenges over the coming years.

Speaker 2: But how do you think that an industry, a utility, could really help these small banks stay abreast of innovation?

Speaker 1: I think actually they can benefit even more from a utility than the larger banks can because they will face pressure from the larger banks and the correspondent bank side. They will face pressure from competition in their core domestic area. And by literally getting access to global rates, they will be able to offer their client base global scale in the core bank services without having any presence in this area. And on the other hand, they can even get flow back from working with a network utility because if they become a member in a certain country, then the global utilities flow would be settled with that said bank in a given country. And the last one is I think they don't have to spend their own resources on doing something outside of the core, which they can then let a utility support them with and then focus all their resources on their domestic area.

Speaker 2: But do you think that such an industry utility model could actually help these smaller banks expand into new markets, especially as some correspondent banks are reducing their footprint?

Speaker 1: Definitely I think they can. And I think when you talk about the new markets, I think it's important, at least in my opinion, if I was a smaller bank, I would not open new markets as in having presence there and trying to actually target consumers and retail, but in terms of literally making sure that I could take my own core domestic area and making sure that my clients would be able to operate globally when they had to transfer funds, when they had to do trade finance and that kind of stuff. And in that respect, I think the utility is a perfect fit for these businesses because that can give them that global access, which can be very hard to obtain when you don't have the scale.

Speaker 2: Thank you so much, Anders. In the final chapter of this four-part series, we'll look at the drivers behind unbundling of banking products and services, as well as the opportunities opening up by re-bundling the bank.