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The Green Sheet Online Edition

April 26, 2021 • Issue 21:04:02

Why banks and fintechs should collaborate

By John Cragg

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 are shaping the future of customer finance.

That being said, as with most sectors, the turbulence generated by the COVID-19 pandemic caused uncertainty within the financial services sector for both incumbent banks and newer players. For example, research from Innovate Finance, www.altfi.com/companies/innovate-finance, highlighted that investment in the UK fintech sector dropped by 39 percent in the first half of 2020, compared to the same period in 2019.

An evolving view of fintechs

Plus, one of the biggest names in fintech, Starling Bank, www.cityam.com/starling-confident-it-will-be-first-challenger-to-make-a-profit/, made headlines in November 2020 for being the first challenger bank ever to make a profit—sparking conversations once again about 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 programs. Clearly 2020 was an extraordinary year that tested many organizations, so what's the solution moving forward?

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. These were spurred on in part 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.

Top four benefits to collaboration

When banks and fintechs collaborate, the results can be mutually beneficial. Following are the top four benefits to these collaborations occur:

  1. Accelerated digital innovation: Becoming more digitally focussed is one surefire way to enhance the offerings of traditional banking institutions. But there is a hefty cost of doing this alone. A report from EY, www.bankingcircle.com/how-banks-combat-legacy-infrastructure-058028, suggests that transforming core technology for legacy banks could cost more than £350 million and take over five years to complete, on average.

    One main driver for fintech's success is their digital-first and cloud-native approach—completely bypassing on-premise environments and complex legacy architecture. Utilizing 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 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, www.tsb.co.uk/news-releases/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.

  2. 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, www.fintechmagazine.com/banking/why-technology-will-drive-customer-loyalty-banking, found that 90 percent 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.

  3. Diverse features to offer: 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 startup. Working together, the companies 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 the POS. This demonstrates the value of introducing new offerings through a fintech partnership that is already serving the target market.

  4. Access to talent and innovation culture: With fintech being one of the most in-demand industries in the world, it attracts, by its very nature of innovation, some of the most ambitious, entrepreneurial and agile thinkers in financial services. But for some of the legacy banks that 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 startups will highly benefit from experienced employees that have worked in traditional financial services institutions too.

Time for change

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, www.finastra.com, around 70 to 75 percent 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 is the time to embrace change, streamline functions and departments, and commence successful collaborations to facilitate industry growth. end of article

John Cragg is CEO of MYHSM. To find out how MYHSM can help you, please visit https://www.myhsm.com/payment-hsm/.

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