Financial news has often portrayed the relationship between fintech and banks and credit unions as smaller, more nimble aggressors going up against a bigger, lumbering opponent. And while it’s true that traditional banking institutions have already begun dwindling, and some won’t make it, many of the fintechs — despite some big winners — are barely making it in their search for customers and steady revenue.
But they don’t need to be natural enemies. Both sides have been taking a fresh look at partnering to build on their strengths and hunt together by reaching customers with a data-informed, tech-enabled experience that answers the demand for fast, flexible, banking services that are less costly to both providers and customers.
Surveys show the interest is there:
“Regional and community banks are the backbone of the U.S. banking industry. And just like larger institutions, these mid-sized and smaller banks see the rise of fintech with clear eyes. While they recognize the disruptive potential of new technology, they often view the situation with real optimism — and the feeling on the fintech side is mutual. More than half of bank respondents (54%) and fintech respondents (58%) see each other as potential partners.” —Manatt Fintech Report
Now, they are focusing on the realities of what they can gain — and what they must overcome — with these partnerships.
The Cost of Competing
When banks and fintech compete, they miss out on key advantages they can offer each other.
The banking industry, with about $2 trillion in capital and an enormous customer base, has all the data fintechs dream of — data that can be used to transform the customer experience into a personalized, highly valued exchange. Customers are getting a taste of increasingly relevant experiences in their everyday lives and they want more. They demand more. But tapping into and acting on that data has often been neglected by banks, sometimes because of traditional sales and marketing goals, sometimes because of legacy systems that hamper their progress.
Meanwhile, the ever-growing number of fintech vendors keeps offering a faster, smarter way to offer and access services. For the many financial institutions struggling to improve and optimize their customer relationships, competing with this onslaught of technology in-house is often a losing, costly battle. Not only does it waste already strained budgets, it gives another fintech an opening to get in and start nibbling at their customers. And that’s often how it works — the customer relationships don’t disappear; they just start to fade.
Meanwhile, even though fintechs are indeed transforming the industry and there is no shortage of big winners already, they are always searching for much-needed customers. And as start-ups, no matter how promising their innovation, the pressure is on to prove ROI with tight start-up budgets.
As Capgemini and LinkedIn reported in the World Fintech Report 2018:
“Globally, more than 7,500 FinTech firms, combined, have raised over 109.8 billion. Yet most will likely fail because: they could not find the right product-market fit, the high cost of scaling up, inability to find the right partner, and the struggle to create, launch, and quickly gain market share for a differentiated product that cannot be replicated.”
Making it Work
Financial institutions with any hope for long term survival know they need to evolve. Trying to retrofit legacy systems while pulling in consultants has largely been a waste of time and money. They can’t compete with the digital paradigm fintech is establishing; they need to absorb it. Which hasn’t always been easy.
Early lessons have taught FIs that taking advantage of the prospect-centric, personalized approach fintechs offer also means understanding that their fintech partners might not understand financial regulations and compliance that banks and credit unions take for granted in their daily operations. Fintechs are all about speed: speed-to-market, rapid response, fast delivery. FIs tend to think more in terms of taking the time necessary to get it right without risk to existing customer relationships.
Finding the right partner is critical to these pacts succeeding, and that search has become a major issue itself.
“Future partner potential should be assessed on four parameters: People, Finance, Business, and Technology,” suggested the World Fintech Report, while noting that “fintech leaders have struggled with traditional institutions’ lack of agility, willingness to partner, and culture fit.”
But fintechs need to bend, too: despite tradition-busting innovation, if they want access to all those customers, they will need to play by the rules and regulations that govern modern banking.
Melding speed and caution, innovation and best industry practices can benefit both sides while allaying frustration, assuming the right team and talent have been assembled. FIs are paying more attention to specialized staff, and sometimes turning to outside resources — experts that understand each end — to broker the partnership.
Transformation: Consumer POV
From the consumer point of view, fintechs are doing banks a favor by driving them faster and harder towards customer-centricity and personalization — a goal that consumers have come to expect on a higher level from other industries. Delivering superior and more profitable customer experience with digital marketing is how fintechs have claimed their seat at the table. But FIs still sit at the head of that table, for now.
Banks have too often settled on just new business to really focus on their key advantage: existing customer relationships and the data-rich story of those customers’ lives. By paying attention to the story their data tells, banks can act on their needs — sometimes before the customers recognizes those needs — slowing the loss of business while creating mutually profitable, lasting relationships that people value.
Fintech can play a pivotal role in helping these banks transform into customer-centric organizations, replacing blind pursuit of quarterly sales goals with agility and intimate communications that deepen relationships. Because there is no turning back: the real hunt is consumers’ non-stop search for a more rewarding experience — and FIs and fintech stand a better chance of meeting those expectations as partners than as adversaries.