Banks and fintechs: Why the future looks brighter together
Conventional wisdom would have us believe that banks and fintech startups mix about as well as oil and water. And on one hand, there’s some truth in that. Ever since small, agile fintechs began emerging, many regulatory bodies and traditional financial institutions have regarded them with suspicion—if not outright hostility.
That isn’t to say the two sides haven’t tried to get along. Some banks have used fintech in commercial banking ventures, while others have stacked technology to provide better consumer solutions. Banks have had varying degrees of success implementing fintech.
But the partnership has a long way to go. If either side hopes to survive, banks and fintech companies will need to learn how to play nice. The question is: How?
Why can’t we be friends?
Many big bank leaders haven’t fully embraced fintech assimilation because they’ve failed to grasp the gravity of their situation. EY Global found that fintech money transfer and payment services, which accounted for 18 percent of that market in 2015, controlled 50 percent of it just last year. With so many small online and app-dominant options available, not even long-standing banks are safe from disruption. It looks more like traditional banks must take some non-traditional steps to thrive in the 21st Century.
This isn’t a one-sided relationship, though. Banks have their own advantages to offer in fintech partnerships. For instance, fintechs lack the business experience, scale, compliance infrastructure and data warehouses to realize some of their bigger goals. The two sides need each other to succeed but still don’t fully appreciate each other.
Differences between banking in Europe and the U.S. highlight the struggles surrounding potential collaboration. To help curb the dominance of big banks after the crash of 2008, U.K. regulators began to allow finance startups to test new products and services with the regulators themselves before offering them to consumers. Such policies have helped European fintechs enter the market quickly.
Because they can’t hold deposits themselves, American fintechs depend on banks to handle part of the process for them. As a result, European startups have seen more investment than their American counterparts: a full 70 percent of the $1.2 billion global investments in banking startups.
Fortunately the two sides are growing closer. As consumers and business clients show more interest in fintech services, banks have begun to seek new ways to integrate. Bankers and fintech firms are (at least for the moment) partners on a path toward sustainable success—even if begrudgingly so. To stay on that path, bankers must be smart about how they deploy their products and which fintech companies they trust to scale with their needs.
Five ways banks can capitalize on fintech
Bankers looking to incorporate the agility and ingenuity of the fintech sector should follow these five steps:
1. Stick with your market segmentation plan.
When targeting a specific market (such as small businesses), avoid viewing fintech partnerships as an opportunity to add a second market—at least initially. Build a reputation and brand around your existing market, solidify your presence and expand only after the first market is secure. This will clarify the value offered to consumers and allow your company to optimize current partnerships.
2. Embrace technology holistically as it evolves.
Fintech companies tend to specialize in small improvements that over time combine to drive big changes. Treat fintech not as a new tool but as a new perspective on the best way to serve clients now and into the future.
3. Utilize your superior data.
Developing first-class financial services requires in-depth research and analysis, and banks possess the most data in this relationship. Banks that fail to capitalize on this data, and share what they can, will limit their fintech partners’ ability to create efficient solutions. It’s wise to put data dependence and advanced analytics at the forefront of these collaborative ventures to maximize returns.
4. Beat competitors to the table.
Start collaboration early. Small agreements today pave the way for larger, more complex partnerships in the future. Work out the kinks before the competition gets there first. If mainstays such as JPMorgan Chase and Citigroup understand the benefits of working alongside fintech companies to solve customer pain points, every bank should take note.
5. Prepare for the next decade and beyond.
Over the next 10 to 15 years, banks will experience increased focus on technological optimization. Fintech creators with great ideas will need bank partners to help create changes and build better products. As financial technology costs drop, the next decade will yield more affordable fintech options and greater returns on fintech investments.
Banks and fintechs need not become best friends overnight; they just need to figure out how to cooperate as they collaborate. The sooner they do that the better because the next few years will determine which financial companies are poised for long-term success … and which face inevitable decline. The correct mindset can forge a solid foundation for transformative collaboration. When adversaries pool their advantages, oil and water can find that rare common ground as valuable resources.
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