Fintech & Financial Institutions: Friends, Not Foes


By Christopher Leonard, CEO, Velocity Solutions

Financial technology, or fintech, is one of the fastest-growing industries in the world, forever transforming the way consumers bank. Thanks to the explosion of apps and online solutions these tech firms have pioneered, consumers are demanding their banks keep pace by offering fast, personal, always-available solutions if they want to retain their business. To overcome these challenges, banks must embrace the growing trend of collaborating with fintechs—working together to create a synergy that neither entity can achieve on its own.

The Threat from Fintech
In recent years, the idea of working in tandem with fintech companies has been an unfathomable idea for many bank executives. Fintech companies—often start-ups that are mostly unregulated—have been viewed as disruptive challengers, siphoning off bank customers by successfully meeting consumers’ changing needs. Many fintech firms, some of which were started by young, renegade “coders,” represent a culture and organizational structure that runs counter to banks. They are flat, agile and open organizations that move at a fast pace, often making decisions in 24 hours, versus 24 months it often takes banks.

However, despite their unconventional organizations, fintech firms have made impressive technological advancements that cannot be ignored. The technology has created new business models, applications and processes, including peer-to-peer payments, online lending, proactive and real-time updates and alerts, and personalized communications and experiences, to name a few. Fintechs are doing what banks have always done—and what consumers demand—only faster, cheaper and with better technology.

And the threat to banks is real. Last year fintech firms controlled more than 50 percent of money transfer and payment services, up from 18% in 2015, according to EY Global. Bloomberg also reports that 36% of all new personal loans were originated by fintech companies in the United States in 2017, compared to just 1% in 2010. Further, a McKinsey analysis shows that 62% of fintech startups plan to tackle the retail banking segment, primarily payments and lending.

Collaboration is Key
As consumers and businesses seek more and more fintech services, banks—at least those that want to outpace their competitors in meeting consumer demands and cementing relationships—must abandon the “us-versus-them” mentality. The answer is to tap into fintech’s strengths, instead of wholesale dismissing these firms as too risky or progressive. The reality is: your customers want the services fintech offers and if your organization is not armed with the technology infrastructure to deliver them, then collaboration is a must.

According to Chris Skinner, digital expert in the financial sector and bestselling author of Digital Bank, “A customer—whether an institutional investor, a corporate client or a retail customer—doesn’t want to look at a thousand fintech start-ups and [figure]out, ‘Can I trust them? Where have they come from? They’ve got no brand. They’ve got no history. Why would I want to use them?’” The customer would much prefer his bank perform the due diligence, curate the technology and bring it into the bank’s structure.

But the benefit of collaborating with fintech isn’t just a one-way street. Banks can teach a thing or two to fintechs as well. Skinner likens the potential partnership to a parent-child relationship, where the financial institution mentors the young firm about customer relationships and the regulatory landscape, while providing business experience, know-how about scaling based on brand recognition and trust and an established distribution network.

To understand the potential of such a collaboration, consider how the right technology could improve the onboarding of a new checking account customer. Today only about 1% of banks nationwide can onboard a customer end-to-end digitally, requiring no in-branch visit, according to Brett King, industry commentator and founder of the mobile-based banking service Moven. Contrast that to virtually all fintech technology, which onboards customers 100% digitally with no human intervention, setting the standard for ease and convenience that consumers expect. Capitalizing on fintech’s inherent digital infrastructure will facilitate banks meeting customers’ evolving demands.

According to Jim Marous, publisher of The Financial Brand, the additional benefits fintech technology can bring to banking infrastructure include:

  • Speed and Efficiency: Fintech firms thrive on speed for the distribution, delivery and innovation that is integral to enhancing customer experience.
  • Transparency: Fintech firms can have a lower cost structure than traditional banking organizations, which allows them to offer services often at a much lower cost than what it would cost banks to build them on their own and to clearly show prices up-front.
  • Personalization: Digital organizations provide highly personalized and customized solutions (think Amazon) using predictive and analytical tools. Banks have a wealth of customer data that is just waiting to be transformed into personalized and contextualized solutions à la fintech.
  • Increased margins & efficiency: With no legacy infrastructure, fintechs can streamline delivery and product development and keep costs down compared to fixed-cost banking organizations with branches and back-office processes.
  • Digital distribution: Fintechs leverage the power and accessibility of “always-on” digital devices, emphasizing simple-to-follow user interfaces that make the customer journey quick, convenient, and seamless.
  • Access to unserved/underserved segments: With a lower cost structure, fintech firms can deliver convenient and affordable services to traditionally unprofitable market segments.

By 2020, fintech collaborations will have an impact on almost 80% of existing banking revenue. Banks that are willing to shift their thinking about fintechs from disruptive threat to beneficial partner will be the winners in keeping up with changing customer demands.