How technology eases the creative tensions between fintechs and financial institutions

From the outset I think it's clear that fintechs need established banks or financial services institutions (FSIs), and FSIs need fintechs.

What's intriguing is how this works in practice, to define the benefits for ‘co-opetition’, and to understand the role technology has as a kind of neutral umpire.

Creative tensions still exist between fintechs and established FSIs. The former are relatively free from the constraints of regulations (which of course can create its own problems) and that allows innovation to accelerate, which in turn leads to the creation of value for customers earlier than might otherwise happen. Fintechs very quickly innovate around that opportunity.?

This contrasts with the banks, which are general purpose service companies providing services to a very broad cross-section of millions of customers. Fintechs have the luxury of focus, and they can pivot if they fail (assuming they have the funding to be able to do so). Banks have the responsibility of diversity and the requirement to operate within regulatory frameworks.

As fintechs succeed, banks start to benefit. Big banks can collaborate with fintechs (or buy them) and in effect outsource and multiply their innovation departments without putting their established systems and services at risk. By being separated, fintechs can leverage the characteristics - being focused, unconstrained, funded, able to pivot, and resilient - that give them a competitive advantage.

That, though, creates a new set of challenges. The problem of interoperability in well-established legacy networks and ecosystems can be large. Banks need to be sure that the fintech breakthrough is indeed fit for purpose, secure, and creates value for customers and users.

Culture too can play a part. The acquisition by BPCE Bank of France of Fidor a few years ago is a case in point. The technology was good, and Fidor now goes to market in its own right, but the culture of BPCE created difficulties early on which for a time led to BPCE seeking to offload Fidor.

And banks can rarely adopt a fintech solution in a matter of weeks or months. It typically takes a year for a bank to successfully implement a new fintech solution. It must pass through internal audits and reviews, pass security compliance and regulatory hurdles, be tested to ensure that it delivers on its claims and that it scales, and customers must see value in the proposition and offering. In considering any such integration, care is needed so that, at the end of the process, neither bank nor fintech discovers that the competitive advantage they had a year ago has gone.

Technology as 'referee'

Running through these complex and strategic considerations sits technology. Partners such as Lenovo can be an ecosystem orchestrator, acting as the platform company for fintechs, and also acting as the management process and management layer for later integration with a bank's existing system or network infrastructure.

Currently, we're leveraging our relationships in both directions to bring fintechs and FSIs together on our servers, PCs and edge devices, storage, and on the hybrid cloud. We also work closely with a number of partners across our growing partner ecosystem, creating new solutions around automation, security, digital transformation, AI, and sustainability. ?

These are examples of how technology vendors can sit at the nexus of innovation between the fintechs and FSIs.?And because the technology layers are not in conflict with the bank or the fintech, and because it can be agnostic from existing platforms within a bank and from the new API-driven applications being developed by the fintech, we can quickly add value to the process without undue risk. Technology can remove friction and create trust.

Technology partners can also facilitate the integration of fintech solutions into larger FSIs. They can facilitate the management of APIs between the fintech and the bank. They can support digital transformation that can allow banks to adopt a more technology-led approach from the fintech. And they can enable banks to build new business models that can position banks to compete against external non-aligned fintechs. An example is the work Lenovo has done with China's Minsheng Bank.

From early mistrust to cautious partnerships

Mutual early suspicion has been replaced by the understanding that banks need the agility, focus and technology of the fintechs, and the fintechs need the funding, trust and credibility, and market presence of the banks.

Banks and fintechs face interesting challenges in the current economy. Global funding of fintechs dropped 46% in 2022, though funding still exceeds that of 2021. The cost of wholesale cash is making borrowing for banks more expensive, particularly in jurisdictions where guaranteed capital reserves are legislated. In truth, we are probably in a downturn period constrained by inflation and reductions in overall economic performance. In such an environment, fintechs probably have the edge - at least those that develop applications, services and solutions that demonstrate real value very early on in their development systems. In turn, such fintechs will be of interest to the banks they seek to compete with.

I believe in the long run, this will also create pressure on the banks to innovate, to integrate, partner, acquire, or to leverage.?

The stakes are high, but so are the rewards. A fintech app that charges one million customers one dollar a day for a service rolls up to be a multi-million dollar income stream.

Technology plays a critical role in facilitating collaboration between fintechs and FSIs, in the provision of devices and solutions, but most of all as the enabler between two different approaches to more quickly create value for customers, and in bridging gaps that remain between both camps.

Either way, if value is created, the customer wins.?