Why Fintechs and Banks are better off working togetherGareth Lewis
This article was first published on Financial IT on 16 November 2022
Fintechs and banks have not always been the most comfortable of bedfellows, with the latter seeing the former as a digitally-powered threat to their business.
This has created a ‘fear’ within banks that fintechs are out to beat them at their own game, as they service customers in a way that banks may not be able to, and fintechs also tend to be nimbler when developing new technology.
The consequence? Many banks choose to build in-house tech to solve the problems they face rather than partnering with a fintech as a preferred option. This approach supports the banks’ traditional view that owning their proprietary tech gives them an advantage. But that is no longer the case.
Building in-house costs time and money
Building the tech in-house is rarely a better solution. The expertise required needs to be hired in and then once the product is built, it needs to be maintained and evolved – that is a recurring expense that could continue to cost the bank millions of pounds each year.
However, the potential for symbiotic relationships between financial institutions and fintechs is emerging. Banks are beginning to see that some of their decision-making processes are too cumbersome and could be streamlined by partnering with a specialist fintech business.
At the same time, many fintechs have realised that they need to clearly position their products and services as an ‘enabler’ for their more established counterparts. In doing so, they are becoming more attractive partners to traditional institutions who no longer view them as a threat. Instead, they are welcomed as a quick and efficient way of transforming legacy systems that will dramatically improve their clients’ experience.
Adoption is increasing
While there has previously been some resistance from banks in adopting fintech propositions, that approach has started to shift – and it is largely down to meeting consumer needs. The Fintech Effect 2021 report from Plaid shows that a massive 86% of UK consumers are using apps and services to manage their finances.
This means that even though banks may have a more traditional business model that does not rely on fintech involvement, their customers are increasingly embracing (and expecting) the online delivery of services. This has created an ‘on demand’ environment that makes partnerships with more tech-savvy companies all the more important.
Coupled with the pace at which digital adoption has taken place over the last few years, financial institutions are increasingly likely to turn to smaller, more agile fintechs that can deliver high quality digital tools that help them to modernise their offering and meet customer expectations. This is particularly true in sectors that have been slower to adopt technology in the past, such as wealth management and investments.
Resistance remains, but why?
Despite the ability of technology to help banks improve their operational efficiency, compliance and speed of processing, digital projects have often faced resistance, particularly from middle managers who see this technology as a threat to their jobs.
This isn’t entirely unjustified. However, rather than seeing technology as a threat, they should recognise how technological efficiencies could free up their time to better serve customers and focus on revenue-generating activity
Take a high-net-worth customer keen to expand the assets held within their portfolio. In practice, a non-tech assisted approach could take anything up to six weeks to source opportunities in alternative assets, assess the viability of the proposition, check the client is at an appropriate level of expertise, understanding and wealth to benefit from this without falling foul of regulatory processes, and then fulfil the transaction manually. The bank employee and the client could be reading and distributing upwards of 100 pages of information to make this happen.
Using technology, the regulatory and administrative processes associated with this type of investment could be reduced from several weeks to just a few days, according to UK fintech Delio. And rather than having to rely on emails being sent and meetings being scheduled, the client is able to access this information, make decisions, and expedite the investment process at their own pace. In an ‘on demand’ world, there is no question about which is the most appealing proposition.
Why partnerships are the way forward
Partnering with an external fintech company that has the expertise, drive and vision to digitise a specific element of a bank’s proposition, which is constantly updated and enhanced, makes sense for most organisations.
The benefits to both the financial institution and the fintech are clear. Once the bank and its staff get past the need to ‘own’ the tech, it will see how useful and relatively cheaper such a collaboration can be.
Nonetheless, there needs to be some education on both sides to ensure that any perceived threat from the tech to the bank’s own staff is overcome, and for the fintech to appreciate and address the concerns the bank and its staff may have.
However, once these issues are resolved, the prosperous relationship they can both enjoy will make the customer journey much crisper, cleaner and faster, helping to improve banking services and retain clients.