Traditional banks are keen to partner with fintechs for their knowledge. But what do the digital players get out of the deal? TOM RITCHIE looks into this.
Traditional banks are facing up to big challenges right now. Buffeted by soaring inflation and interest rates, their customers are keen for new features to help them manage their money yet many of these financial institutions are looking to reduce their operational spend due to the same headwinds.
New research by financial software provider Finastra suggests that banks will turn to fintechs to solve the problem. Its poll of almost 750 banking leaders from across the globe found that 56 per cent of respondents want to make use of a network of integrated fintech solutions, with only 6 per cent preferring to build functionality in-house. Some 75 per cent of banks plan to engage with an average of three fintechs over the next 12 to 18 months.
“The main takeaway from our research is that financial institutions recognise they cannot operate in this challenging environment by working alone, and that fintechs can play a valuable role in helping them thrive,” says EVP for lending at Finastra, Isabel Fernandez.
Fintechs want to be as convenient as possible for customers, and that means going to where they’re used to banking
When asked for their core motivations, 46 per cent of banking leaders reported wanting to reduce operational spend, while 43 per cent wanted to deploy technology with greater ease.
“Building new functionalities or enhancing existing processes in-house often puts a strain on resources and on the teams of people who have the relevant expertise,” says Fernandez. “Fintechs provide ready-to-use solutions built by specialists, often using the latest technology to fulfil a specific challenge or demand.”
Fernandez cites labour-intensive but critical processes such as know-your-customer checks, anti-money laundering and trade documentation where fintechs have been particularly helpful. Banks have quickly leveraged the AI-powered automation offered by smaller companies, saving them time and money, and enabling a speedy authentication process for the end customer. But there are a few possible innovations available across all aspects of a bank’s digital offering.
Fintech partnerships are about much more than cost savings
German neobank N26 has built an ecosystem of partnerships – both with fintechs and a host of other service providers and retailers – to provide added value to their customers wherever possible.
“It’s about a lot more than just cost savings. In our partnerships, we look at cost efficiency, speed of deployment, increasing functionality and the contribution to increased personalisation for our customers,” says Thierry de La Salle, director of global banking operations at N26.
N26’s position as a chartered digital bank, built on the cloud, puts the institution in a best-of-both-worlds position. It is able to build relationships with big incumbents like Mastercard, while leveraging the innovation of fintechs such as the international money-transfer application Wise, more readily than traditional banks.
The bank recently launched a crypto product that allows customers to manage and trade within the bank’s app, integrating Bitpanda’s crypto exchange platform.
“We’re always looking for interesting partners that align with our vision to change the world’s relationship with money for the better,” says de La Salle. “This can mean deepening existing relationships to roll out products like N26 Crypto, which we built with partners in additional markets or leveraging new and exciting solutions to solve financial challenges for our customers.”
Fintech partnerships benefit both parties
While the potential benefit for banks is clear, there is an added imperative for fintechs to expand their partnership strategies with larger financial institutions. The recent slowdown in venture-capital spending has hit the fintech sector particularly hard. A recent report by Innovate Finance shows that investment in fintech globally fell by 30 per cent in 2022 compared to the previous year.
CEO of fintech consultancy 11:FS, David Brear suggests these relationships will become increasingly important for the survival of smaller players. “The market – and the lack of investment – is going to make it hard for organisations that either haven’t raised funds already or don’t have a significant customer base or profitability.”
Fintechs also benefit from the regulatory knowledge of their banking partners and should be able to leverage their trust and credibility. It can also help to raise their profile.
“Big banks have a large and established customer base, which can provide fintechs with access to a wider audience,” says Brear. “This offers fintechs the opportunity to form strategic partnerships, helping to expand their product offerings, access new markets and gain valuable industry insights.”
Banks and fintechs can have very different ways of operating, which can cause misalignment
For Wise, the benefit of partnering with banks is to expand its customer base by reducing the journey to access its services. Wise now partners with several banks, including N26, Monzo and ZA Bank.
“We have 16 million customers who are choosing us over their old provider – usually their bank – to move money across borders,” says head of Wise Platform, Steve Naudé. “But we want to be as convenient as possible for customers, and that means going to where they’re used to banking.”
Naudé anticipates these partnerships to grow over the coming years, with customers now expecting premium services from their financial institutions. As such, fintechs should be actively seeking out partnerships to provide those features.
“Embedded finance and as-a-service products are the future of financial services,” says Naudé. “Taking unique products directly to customers is more efficient and a better customer experience than waiting for customers to come to you.”
Successful partnerships require the right mindset from the beginning
There are, however, various hurdles that banks and fintechs must overcome to create a successful relationship. A study by EY-Parthenon found that 40 per cent of such partnerships fail before operationalising; 75 per cent of the banks surveyed reported a misalignment in operations and processes as a key stumbling block.
“As with any partnership, strong communication is essential,” says Fernandez. “Banks and fintechs can have very different ways of operating, business models and cultures. Sometimes this can cause misalignment in terms of what’s feasible, sensible timelines and ways of working together.”
Financial institutions recognise that fintechs can play a valuable role in helping them to thrive
This invariably means fintechs must learn how to work with slower organisations and interact with legacy systems that aren’t built for collaboration or interoperability.
“Fintechs are often known for their agility, innovation and flexibility,” says Naudé. “Partnering with banks often means working with legacy systems that aren’t always compatible with more modern solutions. We have dedicated implementation and product teams to solve this. And when we’re building products, we develop flexible and scalable solutions that can integrate with different platforms.”
Naudé explains that Wise has a team of compliance experts on hand, which ensures that both parties follow the regulations of their operating domain. This should assuage the fears of banks that work with Wise, as de La Salle reports regulatory alignment as the most important hurdle to overcome before N26 enters a partnership.
“As with all digital business models, there is a field of tension between fast-paced technology and slower regulatory frameworks. So, for us, this field must be mapped out comprehensively to ensure we’re firmly compliant at all times.”
The end game is better customer service
Beyond these concerns, de La Salle says there are few problems between the two parties, but rather “complexities” that once navigated “will almost certainly result in great products and outcomes”.
Ultimately, when done well, Brear says partnerships like these improve the customer experience. He cites several successful partnerships. A collaboration between Santander and Kabbage allows the bank’s business customers to access a lending platform powered by machine learning, which significantly reduces the time until a customer can access capital.
Fernandez agrees, pointing out that by reducing the time to value of new features, the end customer is served better outcomes faster and more efficiently – improving customer satisfaction.
“When banks and fintechs come together, it can help to solve problems, enhance loyalty and deliver a better customer experience,” she says. “All of which is critical to the long-term success of fintechs and banks.”