Digital Transformation Hub

Jan 22 2022 7 mins

FinTechs and Financial Institutions: Necessity of Alliance for Emerging Business

Revolution of FinTech is not a fairy tale or science fiction; reality is that of changing the shape of the global financial system. P2P loans at a fingertip, conscious crowd investing, digital payments, automated financial advisors have appeared to the close collaboration of FinTech startups and traditional institutions. Whereas the former get funding for their out-of-the-box projects, the latter take advantage of digitalization.
Undoubtedly, the results of this alliance are beneficial for both parties. Originally FinTech startups and traditional banks were rivals fighting for every client, but now everything has changed because of the FinTech disruption of financial services. Better client service, enhanced financial security, more opportunities for individuals and businesses, and many more other things are the fruits of the inventors and incumbents partnership.

 

Personal banking app
Photo by Austin Distel on Unsplash

The global crisis forced FinTechs to innovate even more. The players invent new ways of providing reliefs for their clients in terms of decreased fees and chargebacks and build new forms of collaborations, like a platform where consumers can buy gift certificates to support local small businesses during the coronavirus crisis. Another example is Revolut and its charitable-giving feature for users who want to support those affected by COVID-19. The current market environment is evolving rapidly and in order not to leave behind. Such as forces to build a turnkey origination and underwriting platform for lenders of all types to offer funds to businesses, CRI calculating the risk score and ability of businesses to withstand the effects of a pandemic, clients with new lending capabilities through the Open Lending Platform(OLP).

Resources shift. FinTech is not only modifying business models and infrastructure of high-street banks, but it also triggers considerable shifts in their human resources. FinTech is creating in banks raise the demand for specialists with skills and expertise in both finance and development. A lot of innovative positions for cybersecurity analysts, product managers, compliance experts, data specialists have flooded the labour market. It stimulates as well the younger generation to pick a career path that will be relevant in the upcoming years. After all, it forces companies to put efforts into training the existing staff, arranging educational events, improving the tech expertise of human resources.

The impact of FinTech on financial services and market stability is incredible. The leading FinTech providers and successful alliances between startups and incumbents are becoming systemically important. The current legislative base doesn’t cover all the issues related to the activity of non-bank institutions. The use of cryptocurrencies may cause price volatilities and affects payment systems. Evidently, the FinTech industry doesn’t intend to slow down and will only continue surprising with brand-new models of collaborations between young startups and established banks. The financial revolution is based on open innovation bringing together incumbents and third-party providers. Smart regulation will ease sharing data, knowledge and ideas between market players. So openness and collaboration are inevitable.

Collaborative opportunity instead of rivalry. It’s not just banks and financial institutions that can benefit from such an alliance. Yes, FinTech holds the tools that unlock Digital Transformation, but banks have access to large client pools and capital plus vast knowledge rooted in regulatory compliance and licensed financial products that FinTech craves for. It’s a match made in heaven if FinTech and banks decide to join forces. Only then can they both leverage the full potential of the entire finance sector. Replace legacy systems and reduce costs, existing legacy systems have proven too slow for an all-digital time with a massive need for tech upgrades. Many legacy systems don’t provide financial institutions with the revolutionary upgrades needed, despite increasing licensing fees. That has left financial institutions with two options; either build new tech in-house, a slow and arduous process,  or look to FinTech providers for new infrastructures.

The financial crisis of 2008 proved that banks have their work cut out for them if they want to remain relevant and earn back some of the trust lost due to regulatory rigidity and high costs, among other things. A sure way to do it is by partnering with FinTech. Forming alliances with financial institutions is the future for both banking and FinTech. Collaboration via alliances between financial institutions and FinTech companies is an almost perfect marriage: everyone wins, especially clients who will be able to access differentiated and innovative products and services. Innovation distinguishes the leader from the follower. And, this type of alliance can make the difference between being a follower or a leader, for both actors in the financial system. Formerly again, unity is strength.

fintech partnership with financial institution
Image by Gerd Altmann from Pixabay

The increasing pervasiveness of technology-driven firms offering banking services to retail clients has led to a growing pressure regarding traditional banks to modernize their core business activities. Banks attempt to meet the new digitalization requirements by interacting with FinTech startups in the form of alliances. Banks are significantly more likely to form alliances with FinTechs when they pursue a well-defined digital strategy and/or employ a Chief Digital Officer (CDO). It is also evident that a  significantly positive market reactions for digital banks announcing an alliance formation with a FinTech, but no reaction for traditional banks. Alliances are most often characterized by customer service provider relationship between the bank and the FinTech and that most FinTechs operate in payment services.

In today’s financial services landscape, financial technology (FinTech) companies and financial institutions (FIs) are often competing for customers, market share and relevance. It’s no wonder that, generally speaking, FinTechs are posed as threats, and financial institutions are often viewed as archaic and slower moving. But it doesn’t have to be and shouldn’t  be this way. In fact, the best way to compete and thrive in this market is for FinTech and financial institutions to cooperate and allow each to fulfill the roles they do best. Before hangout into how financial institutions must partner with FinTech, let it know how to tackle why they should. FI is to trust as FinTech Is to Innovation, the average consumer thinks about their finances frequently, regardless of their financial means.

One of the hardest parts in combating economic uncertainty and worries is taking the first step to resolve the issue. Fear and anxiety may paralyze consumers from finding and testing a new solution like FinTech services. Regardless of consumers’ financial health, many are reluctant to download an app that will draw attention to their financial situation. However, at the same time, most consumers want to improve their financial situation. To do this, they want the proper tools and they want this to come from a source they trust. Who do people generally trust with their finances.

Older generations— Gen X and baby boomers— are much less likely than millennials and Gen Z to use FinTech as their primary financial management solution. Even though FIs suffered a loss of trust due to the 2008 financial crisis, they showed up for their account holders in a big way recently, by offering mortgage deferral programs and other relief-orientated solutions to those affected by the Covid-19 crisis.

Small and Medium Enterprises searching for something more well-conditioned. In the same vein, small and medium-sized businesses (SMBs) are also constantly thinking about and managing their finances. The difference is that SMBs actively seek out help and critical resources to manage this. Since SMBs want to centralize their financial activities, they typically look to their trusted FI first, rather than a FinTech company often without brand recognition or a pre-existing relationship. But traditional FIs aren’t always equipped to provide what they researching for. While FIs may have trust in the bag for both consumers and SMBs, they have an innovation problem, especially small- to mid-sized FIs. They don’t always have the resources to innovate at the pace required given budgets constraints, and they often prioritize developing “at this instant” projects over those that are important but perhaps less urgent.

Additionally, many small FIs don’t even have modern and robust mobile banking apps, which leaves them even further behind the innovation game. On top of that, they have compliance and Financial institutions benefit from the happiness and trust of customers. People are happy with their bank reported TRUST as the primary reason for deciding where to place their primary bank account regulatory constraints, which leads to the death of most innovations. But guess who doesn’t have innovation problems.

Where FinTech and FI Unite, FinTechs are agile and innovative, which empowers them to adapt quickly to emerging customer needs and market volatility is a necessity that most financial institutions lack. On the flip side, many fintechs often don’t have the brand recognition necessary for consumers and small medium businesses to trust them with their finances. Here is a situation where FinTechs and FIs complement each other’s strengths and weaknesses nicely. FIs have brand recognition, relationships and trust but need innovation. And FinTechs have innovation and agility. It only makes sense for the two to partner to bring innovation to consumers fast. It should do away with Traditional Partnership Models (TPM).

Traditional processes for vetting and implementing FinTech technology are expensive and time consuming, so FIs need to be certain of the ROI from an early stage. Hence, FinTechs are met with a high bar from the very beginning when acquiring FI partners, leading to significant expenses and deployment of resources without the certainty of partnership success. Even if a FinTech manages to get past the sales and vetting cycles, they have a custom integration to perform. Because FIs run on different systems, FinTechs must perform a different integration for every FI they want to partner with. This limits the scalability of their product and delays the FinTech’s ability to recognize revenue. For proper development cycles, FinTechs need to get their product in front of customers quickly, get feedback and incorporate that feedback into future product repetitions. Building a fully featured product without customer feedback is a definite way to waste your time and money. But this is the arrangement that current FI partnership models offer, and it challenges a fintech’s ability to drive efficient customer growth.

A better partnership model would include a single, standard integration for multiple FIs. That way, FinTechs don’t need to perform a custom integration each time they sell their product. These partnerships would consist of the rapid deployment of features and services so Fintechs can test and iterate. Once these requirements are in place, FinTechs and FIs can partner to deliver fast innovation; build deep, lasting relationships with their customers; and create a world where FinTechs and FIs can live in harmony. This, for instance, can be in the form of creating a seamless, user-friendly onboarding experience for customers through a new, modern smartphone app.

It is evident that the traditional banks that use FinTech see profits increase in significantly, approximately 40%, according to McKinsey & Company. In turn, FIs help FinTechs by bringing their trusted clientele and their centuries-long experience of weathering through multiple disruptions to the industry. Partnership with FinTechs Vs. FIs can deliver more efficiency directly to customers and behind the scenes with internal processes, such as end-to-end encryption and algorithms.

About the Author

Md. Kafi Khan HeadshotMd Kafi Khan is the company secretary of City Bank Limited.

https://www.linkedin.com/in/md-kafi-khan-95bb9b83

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