It was only a few months ago that Jamie Dimon, CEO of
JPMorgan Chase, declared that banks should be “scared s***less by fintechs”.
It’s no surprise either as over the last decade the fintech industry has been
thriving with new technology paving the way for financial institutions. A rise
in electronic payments and a preference from customers to handle their
financial services digitally, either online or mobile, has shown that fintech
and digital banking is shaping the future of customer finance.
That being said, as with most sectors, the turbulence
generated by the COVID-19 pandemic has caused some uncertainty within the
financial services sector for both incumbent banks and newer players. For example,
research from Innovate Finance highlighted that investment in UK fintech
dropped by 39% in the first half of 2020, compared to the same period in 2019.
Plus, one of the biggest names in fintech, Starling Bank, made headlines in
November 2020, for being the first challenger bank ever to make a profit –
sparking conversations once again around profitability concerns in the fintech
industry. Fintechs’ traditional banking counterparts haven’t emerged out of
2020 any easier either, with physical bank closures, and the demand to
accelerate digital programmes.
Clearly 2020 was an extraordinary year that tested many
organisations, so what’s the solution moving forward?
As I have discussed before, historically, fintechs have
often been viewed by established banks as competition – this further being
accelerated by the introduction of Open Banking in 2018 and subsequent new
players, and new capabilities in the space. In part spurred on by COVID-19,
however, there is increasing evidence that traditional institutions and
fintechs are seeing each other in a different light, with fintechs no longer
the intruders in the banking space.
Here we explore the top benefits that can happen once banks
and fintechs realise that collaboration can be mutually beneficial.
Drive digital innovation
Becoming more digitally focussed is one sure fire way to
enhance the offerings of traditional banking institutions. But there is a hefty
cost of doing this alone, a report from EY suggests that transforming core
technology for legacy banks could cost more than £350 million and take over
five years to complete, on average.
One of the main drivers for fintech’s success is their
digital first and cloud native approach – completely bypassing on-premise
environments and complex legacy architecture. Utilising the public cloud,
fintechs successfully deliver seamless, convenient and personal end-to-end user
experiences.
With that in mind, traditional banks can leverage fintech
partnerships to gain immediate access to the latest, technologically advanced
applications and platforms to expand and diversify their offerings and meet the
changing needs of consumers. Moreover, it enables banks to break into new
markets and all of this can be achieved in the fraction of the time and cost
that it would otherwise take banks to deploy new services in-house. For
fintechs, collaborative partnerships provide them with an opportunity to
further enhance and expand their services.
One such example of a bank and fintech partnership is TSB
and ApTap. Following TSB’s commitment to the ‘Fintech Pledge,’ in 2020 it
launched a proof of concept with ApTap for a bill management service, which
allows TSB’s customers to see all their bills in one place, enabling them to
switch to a better deal with just a few taps.
Enhanced customer base
Having a sustainable and loyal customer base is ultimately
the desired goal for both fintechs and traditional banks. A recent survey from
Modularbank on customer loyalty found that 90% of respondents believe effective
technology is important in deciding where to bank. That’s why it is imperative
that banks seek to integrate the latest technology within their service
offerings and deliver this with the right fintech partners.
Over the last decade banks have successfully built trust
with their customers which fintechs have been grappling with. A collaborative partnership
can therefore be equally beneficial for both parties, fintechs can further
scale their customer base with the new, added association of trust and banks
can reach new, younger, digitally advanced customers that they were struggling
to serve effectively before.
Offer diverse features
Fintechs are well known for offering unique features. Banks
adopting these can benefit both the customer-facing side of banking and the
internal banking structure. These collaborations allow for services to be
provided that financial institutions working solo do less efficiently or do not
do at all due to the complexity of the technology architecture and operations
on-premise.
Another bank/fintech partnership example is City National
Bank and Extended, a New York City based fintech start-up. Working together the
companies have launched an on-demand, virtual Visa commercial credit card
solution that can be added to Google Pay and Apple Pay mobile wallets for
simplified and secure contactless payments at point of sale.
This demonstrates the value of introducing new offerings
through a fintech partnership that is already serving the target market.
Access to talent and innovation culture
With fintech being one of the most in-demand industries in
the world, by its very nature of innovation it attracts some of the most
ambitious, entrepreneurial and agile thinkers in financial services. But for
some of the legacy banks who operate more traditionally, gaining access to such
individuals can sometimes be a challenge, but it doesn’t have to be.
While there is lots of fantastic talent working at incumbent
banks, by collaborating with fintechs, they get the chance to work with a wider
pool of talent simply by osmosis. It works both ways as well, Innovate Finance
research suggests there will be 30,000 new fintech jobs by 2030, that’s a lot
to fill and fintech start-ups will highly benefit from experienced employees
that have worked in traditional financial services institutions too.
To conclude...
As we slowly edge towards a post-COVID world, one that has
demanded the accelerated development of technology from companies to match the
changing needs of both businesses and consumers, it is now more important than
ever for fintechs and banks to rethink their relationships.
According to research by Finastra, around 70% - 75% of banks
are already working with fintech partners, or plan to do so in the next year.
By working together, more innovative services can be
deployed and as the digital transformation journey accelerates the need for
more agile and tailored solutions becomes essential. Now it the time to embrace
change, streamline functions and departments and commence successful
collaborations to facilitate industry growth.
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