Over the past decade, the rise of B2C fintechs has been touted as a major competitive threat to the dominance of incumbent banks, and for good reason. It is estimated that neobank customers will make up 25% of the market in five to six years time, being drawn in by aspects such as reduced fees and more personalised experiences, among other things.
Naturally, the threat of fintechs has not gone unnoticed, and banks have taken steps to tackle their new competitors (JP Morgan CEO Jamie Dimon being a particularly hawkish example). However, there is also enormous potential to be realised by banks partnering with fintechs, combining their extensive balance sheets and knowledge with the nimble and innovative capabilities of their digital-first peers.
Indeed, we are already seeing an exponential rise in the number of bank-fintech partnerships (perhaps even too fast, depending on who you ask), and 2023 is shaping up to be the year where competitors become collaborators. This may seem like an unusual trend, but when you analyse the cost-benefit of such arrangements, the logic becomes perfectly clear.
The strengths of fintechs
Fintechs’ major competitive advantage lies in their lack of legacy systems. Although it is often argued that incumbent banks are stuck in their ways, the reality is that they are typically full of ideas but held back by legacy environments.
Fintechs, on the other hand, operate on infrastructures that are modern and easy to update, allowing them to test new technologies and bring new ideas to life. They are noted for bringing products to market that are:
Additionally, fintechs are not as constrained by the regulatory environment as banks are, as they offer a more limited range of services. Due to this, fintechs have a certain amount of extra leeway to explore new ideas (as an aside: fintechs which have tried to transition into a bank have run into significant compliance issues).
The strengths of banks
Banks may lack the agility and flexibility of fintechs, but that does not mean they do not have a number of competitive advantages of their own. First and foremost, incumbent banks are decades (even centuries) old institutions that have a deep understanding of the industry, including the regulatory landscape which financial institutions must adhere to.
In addition, banks have access to large balance sheets which allow them to allocate significant capital into new ventures. This, combined with a global network and enormous scale, ensure that banks have no shortage of resources available to them.
It is clear that both banks and fintechs have unique competitive advantages specific to their business models. What if these comparative advantages could be brought together?
Why banks partner with fintechs
In a survey conducted by Cornerstone Advisors, almost nine in ten financial institutions consider fintech partnerships to be important to their business, up from 49% in 2019.
The most commonly cited reasons for partnering with fintechs are:
- Increasing loan volume and loan productivity
- New product development
- Increasing deposit account opening productivity
From these results, it is clear to see that banks value the productivity increases they can gain by partnering with fintechs which are able to test and innovate at an accelerated pace.
When partnerships are done right, the benefits can be huge. Take HSBC and Tradeshift, for example: one of the world’s leading trade finance banks and the world’s largest business commerce platforms. The two companies joined forces to develop a simple online platform which enables businesses to manage their global supply chains and working capital requirements. The success of this endeavour has generated significant revenues for both HSBC and Tradeshift.
An important caveat in this report is that bank-fintech partnerships have not been meeting stated objectives – loan volume and revenues have only seen a significant increase for a small number of respondents. However, the challenges leading to poor results are known and can be remedied.
Overcoming bank-fintech partnership challenges in 2023
Perhaps unsurprisingly, banks have cited technological issues as being the overwhelming reason for their struggles with fintech partnerships. The main roadblocks can be split into three categories.
- Integration with core and ancillary systems: the biggest hurdle for banks entering into a partnership with a fintech company is ensuring that the bank’s technology stack works with the partner’s technology. Poor integration can have wide-ranging ramifications, from minor bugs to complete system failure.
- Digital banking platform integration: as with the core and ancillary systems, banks often run into issues when trying to digitise their operations and integrate with a new digital banking platform.
- Lack of API experience: APIs are the key that unlocks seamless communication between interfaces, but banks often lack the experience to develop or use them properly. To ensure success, APIs must be well thought out and designed to support the business.
These challenges are possible to overcome, but require significant effort; partnerships need to be viewed as critical business ventures, rather than simply ‘nice to haves’. Improvements must be made in three key areas.
Areas of improvement
- Organisational structure: there must be governing bodies in place to ensure quick decision-making across both partnership teams.
- Product development: banks must begin to move more like fintechs – currently, product proposals are still evaluated against metrics such as short-term ROI, meaning only the ‘slam dunk’ products receive approval. Due to this approach many smaller, yet still feasible and successful, product ideas are scrapped.
- Partnership integration: this applies to both technology and culture – the tech should integrate seamlessly with the banks’ internal systems, and there should be harmonious work between bank and fintech.
For those that can get the partnership approach right, the gains in customer acquisition, satisfaction, and revenue can be great. The rapid growth in partnerships shows that the potential has been realised, now in 2023 and beyond the focus must shift to making these partnerships work.