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.”
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:
1.
Outsource
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.
2.
Invest
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.
3.
Nurture
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.