Fintechs and Banks: Breaking Barriers
By Riaz Mohammed for Finextra
Start-ups such as fintech companies are uncovering innovative ways to provide better and cheaper services to customers. The fintech revolution is beginning to take market share from larger companies including banks. So, even though not all fintechs will enjoy long-term success, one thing is becoming very clear: banks will have to integrate with them sooner rather than later. It is time to break down the barriers between them.As the market place evolves through digitization, changes in customer behaviour, a growing affinity with technology and other disruptors or economic factors, industries are forced to adapt to these changes. They are aided by technologies like the cloud and blockchain which can bring their services to market at a lower cost. Fintechs, with the innovative service they provide, often start outside the regulatory framework. This means that large enterprises often lack the agility to quickly spot a growing trend or a gap in the market and or to capitalize on it by offering a suitable service to the market. Therefore they must learn to work with the fintechs.
In the immediate aftermath of the financial crisis there was a wave of consolidation in the financial sector at all levels; companies large and small either got bought, merged or closed down. The resulting market became more monopolistic, with less choice for customers. The crisis more importantly eroded the confidence and trust people had in financial institutions. In contrast, the trust people place on technology increased. Thanks to smart phones and tablets they developed a growing affinity towards technology, allowing it to influence their daily lives more and more. Fintechs used this affinity to springboard their entry into the market with more technology-oriented innovative products and services – be it for retail, insurance or investments.
Large financial institutions are not often as agile as fintech start-ups and have a longer time-to-market as they adhere to process, policies and regulatory framework to which they must comply. Another key factor which restricts them is their complex IT platforms which operate in siloes, making it difficult to develop well-integrated solutions in an agile manner. Often large enterprises still continue to have monolith systems and fragmented solutions which restrict the agility of the enterprise due to the high cost of change – in money, time and resources. In this era of cloud computing, the upper hand goes to the more focused and agile fintechs. Not to lose out, banks, insurers and other large financial institutions are incubating or partnering with these fintechs.
It is a mutual endeavour. Fintechs are closer to the customers as the services they provide are in response to the demands of the marketplace, and this is very appealing to the banks. Fintechs on the other hand need banks because they can provide the scale, the customer base, regulatory and compliance structure, risk management, security, etc. which is vital for growth and sustainability. As the partnership between banks and fintechs mature they will have to be integrated with the banking enterprise. The success of integration will depend on preserving the innovation and agility of fintechs whilst acquiring the governance and controls of the larger banks. This would require meticulous planning from the part of bank to come up with a transformation plan and roadmap to enable the two entities to work together. They will also have to put in place efficient monitoring to gauge day-to-day operations as well as the overall success of the integration.
The success of the partnership will depend on various factors and not all partnerships will be profitable. The cultures within the larger enterprises and the smaller partners can be a lot different. There will be elements that need to be kept separate to ensure that the partnership as whole does not lose its innovative edge once integrated.
A good exit strategy is also vital for banks and fintechs alike at both the business and technology levels. Banks will be partnering with many fintechs for innovation in various parts of their business and thus have to be very strategic in their approach to fintechs. The strategy should allow for the ability to quickly and safely onboard and offboard fintechs without any major impact to the business. This should be the case for business and technology. We may soon be left with a financial sector where fintechs and banks collaborate for each other’s benefit. They both need to prepare for a digital revolution.
First appeared at Finextra