Fintechs And Banks: Collaborating and Building Solutions For The Future

Banks and financial services institutions are under increased pressure from new market entrants, customers and changing technology. These forces have resulted in the emergence of fintech, which is now posing fundamental challenges to the traditional players. Understanding the disruption and identifying new opportunities are essential if banks want to thrive in this new environment.?

New fintech players and innovative technology startups are disrupting the financial services industry by introducing new products, processes, and business models. In response to these changes, incumbent banks are embracing digital transformation to address customer needs more quickly and stay relevant. These two competing trends — disruption from fintech vs. collaboration between fintech and incumbents are shaping the future of finance.?

Today’s digital world calls for collaborative solutions to drive innovation and bring new value propositions to customers. Fintechs have become a trusted partner for banks to collaborate, invest in, and build tailor-made solutions. Fintechs are redefining customer experience by developing innovative solutions to suit customer needs.?

This article will look at how banks can partner with emerging Fintech companies to build new services that meet customer needs while avoiding becoming obsolete in their industry.

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What is Fintech?

Fintech is a combination of financial services and technology. Fintech companies use technology innovation to solve problems in financial services, creating products and services that are designed to make people’s lives easier. Fintech can include various financial services, including online payment systems, alternative lending, biometric identification, financial management apps, cybersecurity solutions, insurance, digital wallets, blockchain and cryptocurrency.

Types of Fintech Collaboration

There are many ways in which fintech and banks can collaborate, including partnerships, acquisitions, and joint ventures. These collaborations aim to create value for customers and an improved experience by leveraging the best of both worlds — the strengths of traditional financial services and the innovative technologies offered by fintech startups.?

• Partnerships are perhaps the most common type of collaboration between banks and fintech. Partnerships can take many forms, from loose alliances to formal joint ventures. Banks partner with fintech to access new technologies and expertise in new markets and bring new customer experiences to market more quickly.?
• Acquisitions - When banks want to absorb an innovative fintech fully, they can buy the company outright through an acquisition. This allows banks to immediately bring the acquired fintech’s products and services into their organization.?
• Joint ventures: Banks and fintech sometimes enter into joint ventures when they want to collaborate but keep their independence and core business model. Joint ventures are more common in markets where the regulatory environment is still evolving and can take many forms.

Why do Banks Partner with Fintechs?

Banks have critical reasons to partner with fintech, including access to new technologies, markets, and customer experiences.?

• New technologies- Fintechs excel at developing new technologies that solve customer problems via better user experiences. On the other hand, banks are often slow to adopt new technologies due to the lengthy regulatory process, making them less likely to be first to market with cutting-edge solutions.?
• Access to new markets- A big challenge for many banks is expanding beyond their traditional needs into new regions and customer segments. Fintechs, on the other hand, are focused on specific elements and geographies. Banks can benefit from partnering with fintech focused on particular markets, such as digital financial inclusion initiatives or specific online channels.?
• New customer experiences - Banks often bring decades-old processes, systems, and products to market, making it challenging to provide a modern customer experience. Fintechs are focused on creating new customer experiences and can often jump to market with a more modern approach to financial services.

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How Can Banks Collaborate With Fintechs?

Banks can collaborate with fintech in three key ways: partnerships, investments, and incubation.?

• Partnerships are perhaps the most common type of collaboration between banks and fintech. Partnerships can take many forms, from loose collaborations to formal joint ventures.?
• Investments - Banks can also invest in promising fintech startups to access their technology and expertise as part of a more considerable funding round. Investments are less about collaboration and more about acquiring existing technologies and expertise.?
• Incubation - Finally, banks can create permanent incubators to foster innovation and provide a space where fintech can develop their solutions. This is often done by funding fintech startups and providing them with space, resources, and customer access.

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Why Should Banks Collaborate With Fintechs?

Banks used to be the only option for financial services: they had a monopoly on the financial services industry. However, the entry of fintech has changed this dynamic. Fintechs are often smaller, more agile companies focusing more on customer experience and service than on navigating cumbersome government regulations.?

Fintechs have created a new marketplace that lets consumers choose from various products and service providers — the “app economy for finance.”

Fintech Collaboration: The New Strategy for Banks

Banks and fintech have experienced their fair share of successes and failures in the past decade. While banks have lost some customers to fintech, they have also invested in innovative startups to expand their business, develop new products, and compete with fintech.?

Banks are increasingly looking to collaborate with fintechs rather than compete with them. Some banks have even adopted the term “FinBanks,” indicating that the two industries are increasingly integrated and should work together to serve customers better. While the future of fintech is uncertain, one thing is certain: the future of financial services will be shaped by banks and fintech collaborating.

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Bank-Fintech Partnerships Are About More Than Just Developing New Products

Banks and fintech can collaborate on more than just developing new products. The two industries can also work together to improve existing solutions and ease regulatory pressures.?

• Improving existing solutions - Fintechs can help banks improve their technological infrastructure, provide better customer experiences, and create new products.?
• Improving the customer experience - Customer experience is key to winning and retaining customers. While banks have been struggling to make the most of their resources to enhance the customer experience, fintech has been focused on creating solutions that make people’s lives easier.?
• Improving the regulatory environment - Banks and fintech can also proactively improve the regulatory environment. While nobody can predict the future of fintech and financial services, banks and fintech can work together to ensure that regulations don’t stifle innovation.

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Ways Banks Can Partner with Fintechs to Remain Competitive

Banks can partner with fintech to remain competitive and relevant in the future of financial services. There are a few key things banks can do to improve their partnerships with fintech and strengthen their position in the market. Investing in innovation - While banks should partner with fintechs to access new technologies, they should also invest in innovation internally.?

Banks should ensure they have the right resources and processes to support innovation. Expanding the fintech partnership portfolio - Banks should look to expand their portfolio of fintech partnerships.?

While working with a few promising fintech, bringing new voices into the collaboration is also essential. Partnering with a broad range of fintech - Banks should partner with fintechs across the value chain. Fintechs can provide payment, lending, insurance, and customer service solutions, among others.

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The Dark Side of Bank-Fintech Collaboration

Banks can face several challenges when they work with Fintechs. One risk is that banks will become technology suppliers or “frenemies” to their customers. This is where banks are used as a back-end supplier of technology and products to their customers but are not the main focus of the customer’s attention.?

Fintechs are often better at marketing and customer acquisition — the “shiny penny” that grabs customers’ attention — so banks risk becoming irrelevant while still holding the customer’s funds.?

Another risk banks face when collaborating with Fintechs is over-reliance on technology. This is where banks heavily rely on a Fintech partner to manage customer relationships and risk. This can lead to bank customers being left out of the conversation, leading to customer dissatisfaction and lost revenue.?

Another challenge for banks is the risk of becoming overly dependent on one Fintech partner. If a bank relies heavily on one specific relationship, it leaves itself vulnerable to disruption from the Fintech partner. For example, if the Fintech partner leaves the relationship or goes out of business, the bank’s business could be heavily disrupted.

Disruptions in the Financial Services Industry

The rapid growth of Fintechs is prompting banks to transform their business models and adopt new technologies. Previously, banks were primarily focused on their core activities: simple lending and deposit products.?

However, in response to new market entrants, banks are increasingly looking to diversify their product offerings and provide services that were once considered outside their core competencies.?

Banks are responding to disruptions in the following areas of their businesses: -?

• Traditional customer interactions: Banks are migrating to digital customer interfaces to remain competitive in customer acquisition and retention.?
• Personal finance management: Banks are expanding their customer offerings beyond traditional lending products to provide customers with tools to manage cash flow, debt, and investments.?
• Business banking and supply chain finance: Banks are expanding their product offerings to provide financing and technical services to large corporate clients and small businesses. This is in response to the growth of fintech providers that offer financing solutions to businesses.??

Steps for Banks to Build Successful Relationships with Fintechs

Banks can build successful relationships with Fintechs by adopting the following strategies:?

• Invest in technology: Banks must first invest in their own technology to be able to integrate with and use the technology of Fintech partners. Fintechs often use new technologies and platforms to deliver their services. Banks can use technology to access new product offerings, customer data, and customer insights.?
• Create a favorable regulatory environment: Banks must create a good regulatory environment for Fintech partnerships by encouraging innovation and competition. This can be done by minimizing regulatory uncertainty and bureaucracy.?
• Be collaborative: Banks must be open to collaboration to find the right partners and quickly implement new services.

Bottom line

The future of finance will be shaped by collaboration between banks and Fintechs. The best way for banks to respond to competition from Fintechs is to embrace the spirit of cooperation. Banks collaborating with Fintechs can provide a better customer experience, access new products and services, and stay relevant in the digital age.