A portmanteau of financial technology, fintech companies offer a vast variety of services. Armed with new, innovative technologies that make transactions more frictionless and seamless, fintech companies provide a lot of value to financial institutions such as banks and credit unions.
Complementary, rather than competitive
When fintech companies first came on the scene, they were described as competitors of financial institutions. However, they’re not disruptive in the sense that they’re trying to usurp traditional banks but rather disruptive in that by collaborating with incumbent institutions, they have the ability to change the status quo. They are complementary rather than competitive because together they can compensate for each other’s weaknesses and amplify the other’s strengths.
Fintech advantages
While fintech companies lack the experience of traditional financial institutions, they:
- have the ability to innovate quickly
- can build great customer experiences
- are unencumbered by legacy processes
Financial institution advantages
While financial institutions can’t innovate quite as fast as fintech firms, their many years of service gives them:
- capital
- reputation
- regulatory experience
- customer trust
- established relationships
- brand recognition
They’re also better equipped with risk management and security tools to adhere to industry regulations. Security is a major point of concern for consumers; according to an Accenture survey, 86% trust financial institutions to securely manage their data, while only 2% trust consumer technology companies.
Why should financial institutions work with fintechs?
Consumer habits are evolving and significantly impacting how companies do business across all industries. Financial service is no exception; transactions are becoming more frictionless and convenient. Banks need to adapt and cater to their tech-savvy customers who want more security, as well as faster, more convenient digital solutions. Financial institutions are recognizing this but due to legacy infrastructure and a complex web of regulations, they can’t move fast enough to provide those value-added services to their customers. In order for them to diversify their product offerings, financial institutions require the nimbleness of startups to execute. Financial institutions across the board can benefit from working with fintech companies:
- Big banks: Encumbered with rules and regulation, partnerships with fintech firms will help big banks bring new technologies for their clients to market faster.
- Small banks: Partnering with fintech companies helps smaller banks compete with larger financial institutions, offer value-added services to their clients, and expand.
- Credit unions: The industry-leading technology of fintech companies help credit unions offer the same level of solution and support to compete with traditional banks and stay top of mind in a competitive market.
Fintech companies will continue to evolve their technologies to better help financial institutions differentiate themselves.
The opportunities
Financial institutions and fintech startups need each other. Through these partnerships, fintech companies can continue as innovators while leveraging the authority, experience, and regulatory knowledge of big banks, while financial institutions can better cater to their clients with value-added technologies that drive revenue, business, and retention. By combining their strengths, fintech firms and financial institutions are able to deliver financial technology products that meet the needs of today’s consumers.
UBS Bank Management surveyed 61 big banks and found that 38% already have a partnership in place — this number will only continue to rise. Reseach by IDC Financial Insights revealed that six in 10 global banks are open to partnering with fintech companies, while 34% are open to a collaboration. Investment in fintech grew from $1.8 billion to $19 billion in five years. Below are just some of the major partnerships between the incumbents and startups in the last few years:
- CIBC and Payfirma
- Barclay and Techstars
- JP Morgan and On Deck Capital
- RBC and Wave
- Scotiabank and Digital Factory
- Scotiabank and Kabbage
Legacy financial institutions and agile fintech startups will continue to work together to bring innovative payments technology to market, disrupt the incumbent status, and respond to the habits and expectations of the modern consumer.