Comparing financial technology (fintech) companies to legacy financial institutions can invoke an image of David and Goliath. Fintech firms may be small, particularly when compared to the established titans of banking and financial industries, but they’re certainly fierce.
With the use of emerging, often mobile, technology and smart design to provide customized experiences and slick user interfaces, the adoption of fintech has been impressively swift. EY estimates that 15.5 percent of digitally active consumers have used at least two fintech products within the last six months – with rates anticipated to double in the next year.
The meteoric rise of fintech companies has not gone unnoticed by their big bank counterparts. Jamie Dimon, JPMorgan Chase CEO, wrote in his annual letter to shareholders: “It is unquestionable that fintech will force financial institutions to move more quickly, and banks, regulators and government policy will need to keep pace.”
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But rather than duking it out to the bitter end, fintechs and legacy financial institutions are discovering that they are better friends than foes, combining their strengths to offer an exceptional and innovative customer experience in the process.
Working together to fill in the gaps
Traditional financial intuitions have had decades, if not centuries, to establish their brands and build rapport with consumers. But their reliance on old systems and procedures have stifled their appeal to a tech-savvy customer base. Yet, there’s no way to avoid it.
From simple banking, to mortgages, loans, investments and debt consolidation, the modern banking experience is becoming more digitized, and fintechs have played a significant role in that evolution. Not tied down by traditional thinking or extensive regulation, fintechs are providing new and fresh perspectives to addressing customer needs and opportunities.
Intuitive user interfaces, personalized solutions and real-time recommendations based on interactive data are just a few of the unique characteristics fintechs are utilizing to redefine the customer experience. However, what they offer in innovation, they often lack in experience, capital and consumer trust, particularly as it relates to security. Blumberg Capital’s 2016 fintech survey found 72 percent of Americans listed security as something to be concerned about with new online banking services, and that they are not confident that their information is private.
By partnering, more traditional institutions and fintechs are able to bring unique value to the table and ultimately offer customers an innovative, full-service banking, investing or payment experience.
Three partnership models
JPMorgan Chase has now partnered with more than 100 fintech companies, and it’s not alone. All major banks, including Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo, have invested in fintech start-ups. These partnerships are a delicate balance of give-and-take with three key models emerging:
Banks are no stranger to the outsourcing model, having long utilized external partners to perform various customer care, IT and back office functions. Outsourcing has helped financial organizations improve efficiency, lower costs and even generate top-line growth.
With a proven track record, an outsourced model can enable traditional firms to meet more demanding customer expectations. For instance, JPMorgan Chase is using fintech firm On Deck Capital to help offer quicker approvals and same-or-next-day funding to some of its four million small-business customers. Many banks have also employed IT Outsourcing in a similar fashion, to gain creative technology solutions that may be too expensive or specialized to develop in-house.
Many large financial institutions are eager to invest in fintech start-ups in an effort to manage disruption. Goldman Sachs, Citi Ventures, JPMorgan Chase and Morgan Stanley have put money into Square, a mobile payments company, to ensure access to its innovative technology. Meanwhile, JPMorgan Chase and Goldman Sachs have bet on online brokerage Motif Investing, and Morgan Stanley, Bank of America and Citibank have all invested in Visible Alpha, a start-up offering a platform to interpret and forecast stock data.
The benefits to both parties for this option are extensive. It’s a relatively easy, low-risk way for banks to access innovative products and services that can strengthen their customer relationships and get a leg-up on the competition. For their part, the start-up secures a huge distribution network and regulatory compliance.
To nurture new ideas in the marketplace, many banks are plugging into the start-up community without buying any direct equity. They start their own incubators, accelerators or innovation labs to get early access to new technologies and ideas from thought leaders in the industry. Wells Fargo, for instance, has pumped funds into boot camps to support a start-up developing automated real estate transaction technology, and another early-stage company exploring voice technologies.
Some banks also sponsor hackathons to discover new ideas, technologies and the best potential partners for mutually beneficial collaboration. Hackathons and other rewards-based competitions can get a bank’s brand some recognition in the start-up community, while exposing the bank’s staff to new ideas and technologies. The downside, however, is that there is often no exclusivity in most of these partnerships.
The road ahead
With pros and cons to each, most banks and fintech companies are experimenting with multiple partnership models to cover their innovation bases. While each partner reaps some benefit in the symbiotic relationship, the real winners are consumers. The evolving partnerships between fintechs and big banks ensure inventive banking solutions, built on a foundation of trust, and focused on the changing needs of today’s savvy customer.