The days where people would visit their local bank branch to take care of all their financial needs are gradually disappearing. The digital era has now taken hold of the financial sector. Now, consumers can rely not only on their banks, but also on a bunch of privately created apps and third-party services to manage their financial data and transactions. Fintech companies have largely been responsible for this technological disruption. However, banks still remain important institutions in the global financial infrastructure. Despite the perceived competition of these two financial players, opportunities exist to use the strengths of both to create hybrid financial products and bring innovative solutions to customers.
The Divide Between Fintech and Banking
While fintechs have taken the spotlight in the current financial market, both banks and fintech companies have their own strengths and weaknesses. Banks have historically been strong in providing reliability, given their institutional nature and connections with government. Their long-established reputations help gain the trust of their customers. Additionally, the long existence of banks and their steady growth over the years gives them the added advantage of greater manpower and greater access to capital when compared to fintech companies.
However, banks are not quite as agile as fintech firms, since they are heavily regulated. Banks are hampered by legacy technology, old operational systems that are out of touch with the modern digital age. Additionally, their long-standing traditions can at times be a barrier to innovation, especially regarding the use of technology. Despite what they lack in history and experience, fintechs make up for it by filling the gaps in the financial market, both in terms of products offered and populations served. Fintechs are using the latest advancements in AI and machine learning to create easy to use services that can predict and advise their clients on everything from spending habits to loans and investments. Additionally, due to their technical prowess, fintechs have greater access to and analytic power for big data, allowing them to gain quicker insights into the behaviors and needs of their customers
Especially in the payment industry, fintech companies have been able to deliver products and services focused on innovative digital and mobile offerings, an area that banks, until now, have been slow to fully embrace. Modern consumers want payment solutions that are fast, easy to access, highly secure, and which offer them unique rewards or bonuses for their loyalty to the brand. Given these changing customer attitudes towards payment, banks have often been left behind when it comes to innovative new payment technologies, like peer-to-peer (P2P) payments.
Possibilities for Collaboration
While competition will undoubtedly continue to exist, both banks and fintechs stand to benefit from collaborating. Fintech can actually complement the existing banking structure by offering add-ons to people’s bank accounts, such as budgeting apps or P2P transfers, that increase the overall value of the account for customers. With the recent beginning of “open banking” policies in Europe, such collaboration has become even easier. In fact, a survey by PwC found that 82% of banks plan to increase the number of partnerships they have with fintech companies over the next three to five years.
There are many ways in which banks can team up with fintech firms. For example, banks may want to partner with a fintech company to offer customers AI powered investment advice via a chatbot. The main focus of collaboration between banks and fintech should be on creating mobile-based financial services for customers. In a recent survey, 55% of U.S. adults reported using at least one mobile banking app. This presents a clear demand for mobile-based solutions, and banks should deliver. Using open APIs and sharing data can allow more tech-savvy fintech companies to help banks make these apps truly user-friendly and create a loyal customer base.
Some of the largest disruption by fintech relative to banking has occurred in payments. Convenient money transfers and mobile payments are the two areas in which banks are most lacking when compared to fintech. The rise of third-party, mobile P2P payment apps is a clear example of fintech excelling in this area. In the US, for example, 33% of smartphone users used mobile P2P payments at least once a month. Banks can collaborate by backing such apps, such as in the case of Zelle, a P2P payment app backed by over 30 US banks.
Steps for the Future
Banks will require proper IT security compliance and regulatory oversight from fintechs in order to collaborate fully. While personal finance apps for budgeting and P2P transfers have been adapted quickly, a survey of US consumers showed that 47% were still too concerned about security and data privacy to use their mobile for a loan application or for other financial tasks. Fintech will prefer to partner with banks that can adapt quickly and which have an innovative company culture that favors improving the traditional model. To match this, banks will need to focus on getting rid of legacy technology and revamping their infrastructure with mobile friendly tech and open APIs.
Although the relationship between banks and fintech companies is often seen as hostile, both parties have much more to gain from each other than they have to lose. By joining their respective strengths, banks and fintech can both remain relevant in the financial industry. Collaboration efforts will need to be focused on providing mobile, app-based products and convenient payment services in order for both parties to have a bright future.