COVID-19 brought about a global shift in the financial market as the world embraced the digital financial space. With growing digitization, the romance between traditional banks and fintechs has blossomed like never before. This Valentine‘s Day, let’s understand how their relationship has prospered to date and what its future looks like.         Â
Fintechs and established financial institutions have always worked hand-in-hand. The emerging tech-frenzy fintechs are driven by ad campaigns and controlled by slick app interfaces. Yet, they have always relied on a bank’s network or some form of partner license for an impactful existence in today’s dynamic market.
For example, challenger banks have not just offered services of a traditional bank to their customers but have also provided the latest fintech services such as digital payments, credit access, and personal finance. Such banks have triggered a new wave among financial organizations, as they seem to balance out a common thread between all-digital and legacy banking without challenging either of the two.
Greg Satell, an international keynote speaker and advisor, called for a new era of “mass collaboration, often involving direct competitorsâ€, as he wrote for Harvard Business ReviewOpens a new window . He opined that the past decade of Facebook founder Mark Zuckerberg’s ‘move fast and break things’ tactic might soon become obsolete.
To grow and stay relevant in today’s fast-paced market, businesses are now reaching out to industry leaders beyond their own spectrum to handle and serve their customers’ ever-changing needs. For many fintech firms, this has become a norm as collaboration is deeply rooted in their DNA. New-aged fintechs routinely partner to boost their capabilities and deliver customers tailored services.Â
Having said that, some upcoming fintech startups and established banks are now taking up a collaborative drive to deliver modern solutions to meet the growing needs of customers who seek alternative ways to access their money as the threat of COVID-19 still plays on their minds.
A Collaborative Partnership
Most pioneering fintech startups are aiming to create a bridge between traditional financial infrastructure and the modern digital one. This has been a general principle for fintechs as most founders intend to leverage technology to solve a problem that traditional finance cannot.
Collaborative partnerships between established banks and fintechs is advantageous to both. Banks can offer decades of customer loyalty, scale, and established networks in return for the digital agility and innovation of fintechs. The relationship thus provides a delicate balance between the two financial niches.
According to Interbrand’s data on Best Global Brands Ranking 2020Opens a new window , top financial institutions are a part of the top 75 global brands. This includes J.P. Morgan (22), VISA (45), Goldman Sachs (49), HSBS (64), and Morgan Stanley (69). The list of brands also includes some modern-day giants like Apple, Disney, and BMW. This shows the role recognizable brands play when users make decisions about the way their finances are managed.
Simply put, one cannot expect people to switch away from the banks they have trusted for generations. Although consumers seem delighted to replace their DVDs with Netflix, or opt for Uber over a local taxi, they tend to stick to a more conservative approach when it comes to their finances.Â
While this only presents one side of the coin, the other side seems brighter where consumers are willing to adapt to newer ways of managing their finances as the older ones, as traditional banks are on the verge of extinction.Â
WirexOpens a new window is one such fintech that benefitted from both sides of the partnership. Wirex is a digital payment platform with a mission of making crypto and traditional currencies equal and accessible to everyone. Its fintech services allow users to manage all their funds in one place, whether it is a fiat currency such as GBP or EUR or a virtual currency such as Bitcoin or Ethereum.
“The IBANs that Wirex users get are provided by LHV, the largest and most dynamic bank in Estonia, via a seamless integration with their API,†Georgy Sokolov, co-founder of Wirex, explainsOpens a new window . “On the other hand, we have a great and developing partnership with Maker Foundation, the organization behind the DAI stablecoin, where we bring our users the benefits of the nascent decentralized finance (DeFi) industry by bridging it with the traditional one.â€
Similarly, big banks like BBVA have collaborated with fintech startups. Derek White, BBVA’s global head of client solutions, while speaking at the Valentines Day show in London in April 2020’explained BBVA’s approach of collaborating with fintechs. Detailing BBVA’s collaboration model, White saidOpens a new window : “As a large organization looking at how we do engagement in ecosystems around the world, there are four key things that we look at. You can describe it – to go with the love theme for tonight – as develop, acquire, partner, and invest – and you can think of getting to first, second, third, or home base!â€
A Symbiotic Relationship for a Brighter Tomorrow
Currently, the entire financial system is undergoing a rejig with decentralization as a pivot. In that context, banks have never had their eyes on prioritizing resources for digital agility. But with the changing trend, banks are entering the most valuable and sought-after partnerships that offer a continued path of innovation and support to their consumers and themselves. This symbiotic relationship between the foundations of traditional finance and the sharp fintechs is driving the financial sector towards the digital future.
Ellen Moeller, head of partnerships (EMEA) at Stripe feels that banks offer the infrastructure for the products that the fintech builds for its customers. She saysOpens a new window , “Ultimately, it is this network of partnerships with banks, card networks, and payment methods around the world that makes Stripe an access point for new fintechs wanting to build products on top of existing financial services infrastructure.â€Â
Banks are looking for partners ‘for a brighter tomorrow’ as the immediate demands are inclined towards digitization. Fintechs, on the other hand, are also seeking investment from their partners, to form a great value proposition for their merchants. Thus, the symbiotic blend of traditional banks and modern fintechs promises a brighter future for the banking sector.
Managing the Regulatory Setup
Privacy breaches and personal digital data thefts are growing concerns in various sectors today. Similarly, financial fraud and criminal activity are prevalent in the finance domain. Although digital finance is already highly regulated, the cryptocurrency field is at risk where the introduction of a new digital token via an initial coin offering (ICO) is the crucial first step and is generally targeted by the attackers.Â
Therefore, banks commonly partner with established financial institutions, who have developed anti-money laundering (AML) policies and have security expertise. It goes without saying that close collaboration between players across sectors is vital for fintech firms. This allows the firms to maintain the integrity of the online financial framework and push the scope of their business while remaining insulated within an organization that has a well-streamlined regulatory setup.
One needs to understand that collaborating to manage regulation doesn’t hinder fintech’s innovation, but instead opens up more avenues than ever before for new innovators. PSD2 (Second Payments Directive) and Open Banking are good examples of this approach. They encourage competition among the traditional players and create opportunities for fintech innovation at the same time.
The Pandemic Effect
COVID-19 has caused havoc across industries. Therefore, many businesses are leveraging technology to reach out to every customer possible via digital means. Almost all sectors have seen an urgency in moving towards digitization.Â
Though it’s quite unclear if COVID-19 has had a similar impact on the fintech space but it surely has impacted traditional banks as banking institutions have looked to form partnerships with payment companies as banks viewed it as a last resort to reach out to their customers.Â
The pandemic has accelerated the shift towards digital commerce, thereby making it inevitable for traditional banks to enter into partnerships with fintechs. The sprouting requests for partnerships seem business as usual for most fintechs as they have always been collaborating with banks since their inception.Â
Fintechs and Banks: Partners in Crime
The evolution of the way customers manage banking and financial services in today’s modern age highlights why fintechs and banks should work together. Technological advancements that have changed people’s approach towards banking include the following.
- Mobile devices
According to Pew Research Center’s surveyOpens a new window in June 2019, about 81% of adults in the U.S. owned a smartphone, and more than half owned a tablet at the time. The number of smartphone users climbed by 46% since 2011. Hence, banks wanting to connect with their customers have considered ways to make their products and services mobile-friendly, which is possible with fintech collaboration.
- Cloud usage
With cloud, individuals can access their banking details from anywhere and receive financial updates in real-time, which was not possible previously. Cloud allows faster transactions and easier access.
- Online services
A handful of consumers still visit a physical bank branch when they wish to use their financial institution’s services, but most have embraced online banking. Online services have been useful in exercising money transfer between accounts, check deposits, tracking transactions to name a few.
- Security awarenessÂ
Today, consumers are well aware that data security is of paramount importance for any type of transaction that takes place online. Now, since a bank may not have the resources or knowledge or a technical team to focus on data protection on its own, working with fintech companies, which have a better understanding of vulnerabilities and ways to protect against them, is an observed pattern today.
In conclusion
As banks and fintechs partner up, they can harness recent changes in consumer behavior and use of technology to capitalize on the trust people show in tech by providing services that effectively engage their consumers.
The collaboration and partnership between banks and fintechs is exciting and real as it is in everyone’s best interests including the end consumers. One can debate whether fintechs have really made the difference, but they have certainly made the financial industry better especially with their digital presence. Fintechs have raised the bar significantly and ultimately, it’s the consumers who emerge as the winners in this case.
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