Banks and fintechs – friends or foes?
Fintech companies – technology firms focused on innovation to financial products and services – are often painted as competitors to traditional financial services organisations.
Although some banks have long considered fintech companies as foes – concerned that financial technology innovations are usurping their customer base – the future of banking should not be a competition between the two, but rather a strategic partnership in which banks and fintech companies use their skills to better serve the needs of the consumers.
Financial technology and banking: history repeats itself
Technology integration in banking is nothing new – in fact, many innovations that are now a normal part of banking were once seen as a threat to the institution.
The implementation of automated teller machines (ATMs) is one of the first major examples of a disruptive technological advancement that found its place as an innovative tool after originally being seen as a threat to traditional banking. The benefits ATMs awarded to consumers is what brought it to the forefront of banking and even presented business advantages for the banks themselves. As a result, consumers now have access to banking services 24/7, allowing banks to continue business after hours and save money on operations.
Similar to the invention of the ATM, fintech companies have found financial inefficiencies they can streamline and solve in a way that benefits the consumer, the banks and their own company.
Reuters (a Reuters terminal) revolutionised transparency in banking and was also originally seen as an institutional threat. Reuters listened to the marketplace – which at the time was looking for additional insight into pricing – and went to banks as a financial technology company looking to collaborate. They convinced banks that if corporates had better visibility into pricing, they would feel more comfortable placing hedges. This would, in turn, result in providing desired transparency to consumers, fueling revenues for banks and driving business for themselves.
By embracing this technological advancement in addition to ATMs, traditional financial institutions benefited and early adopters gave themselves an advantage over the competition all while providing consumers with more efficient, streamlined services.
Technology has continued to change banking through widely used online services and apps. Now, major financial institutions have embraced a variety of financial technologies including EMV chip and pin cards and mobile check deposits by optical character recognition (OCR).
Most recently, a major disrupter has taken the payments industry by storm – the adoption of digital wallets, such as Apple Pay that allow for payments to be made via a consumer’s smartphone. While most banks had to agree to either discount interchange fees for transactions or cut down what Apple pays in processing rates, they are able to make up those losses by the potential increased volume of credit transactions made by consumers.
Banking innovation through ATMs, Reuters, mobile banking, etc. were all once seen as a threat to traditional banking, but have since proven to be complementary solutions that paved the way for implementation of new, strategic technological innovations to the financial services industry through future fintech partnerships.
A new banking frontier
The landscape of the banking industry is shifting, much as the rest of the world is, toward automated technological advancements. And although the transition may be turbulent, the only way to differentiate themselves from the competition is to be an early adopter of the latest technologies through strategic partnerships with fintechs.
The concern of losing customers or suffering negative profit margin impacts may seem valid, but fear is disrupting the possibility for growth and new business opportunities and, as is the case with Apple Pay, profit margin losses in one area can be reconciled and even increased in another.
Instead of viewing financial technologies as competition, traditional financial services organizations should consider the advantages of strategic bank/fintech partnerships. Benefits of these partnerships, such as cost reduction, differentiation, improved retention of customers and additional revenues, can further position banks to succeed in a digital marketplace.
As fintechs seek to gain market share that is currently dominated by banks, those banks are looking to stand out in the marketplace. By providing fintech services consumers want to buy but do not readily have access to any other way, banks can drive more consumer business. This strategy is already developing in the marketplace as an increasing number of financial institutions are embracing the disruptive nature of fintech solutions to address customer needs, including 24×7 accessibility, faster services and easy-to-use, intuitive product designs. Implementing fintech solutions into the strategies of traditional financial institutions gives them the opportunity to strengthen customer relationships and address new field innovations.
What to look for in a fintech partnership
When making the decision to partner with a fintech company, it is important to select an organization that not only fits the needs of a financial institution but one that will help enhance the institution’s relationship with its customers as well.
With that in mind, consider the following:
- Look for a Software-as-a-Service (SaaS) based technology provider to ensure solutions are fast, efficient and always up-to-date.
- Pick a provider deploying best-practices for your institution’s focus area.
- Select a technology that is fully customizable the financial institution’s (and consumers’) needs.
- Find a partner that continually adapts as consumer needs and technologies evolve.
- Choose a fintech provider that treats automation as a priority, ensuring streamlined, infallible service.
The bottom line
Innovation typically improves inefficiencies and financial institutions are already leveraging strategic relationships with fintechs to remain compliant while providing customers with the quality of service they demand. It is important for both banks and fintechs to continue putting customer needs first, and it is their responsibility to adapt and grow.
If structured properly, a collaboration between banks and fintech providers can be beneficial not just to consumers and fintechs, but to the banks as well, allowing them to continue to focus on their core business while creating a competitive advantage over competing institutions.
By Wolfgang Koester, FiREapps CEO