The rewarding and bumpy road for an efficient Bank-Fintech collaboration
Collaboration and co-creation with Fintechs is on the rise. This has accelerated over the last few months, probably fuelled by the economic downturn and the race to digitization. Banks continue to engage more and more in proactive collaboration with these agile players, and invite their large clients in co-creation exercises. At the same time, the Fintech industry continues to expand and to mature, with 66 VC-backed Fintech unicorns at the end of Q2/2020, worth a combined $250bn (source: CB Insights).
Mariage de raison
Many reasons can explain this “mariage de raison” between a rather conservative industry and these technology disruptors, to create complementary business models. Furthermore, for some more advanced financial institutions, to create a Fintech-driven ecosystem to serve their customer needs on a technology-driven platform. Among these reasons:
- Fintechs continue to be a critical source of innovation into the banking industry, and offer in some niche markets, cheaper solutions and an impressive time to market;
- Next to these innovative ideas, the majority of incumbents have recognized that these new players offer new tools, new platforms and new customer journeys that give them more opportunities to create intimacy with their corporate clients and their underlying data;
- Banks having chosen this collaborative path are less and less worried about sharing part of their revenue pie than being marginalized by their major corporate clients, looking for innovative and creative banking partners;
- Banks are more focused on keeping the pace with large e-commerce players, with the latter becoming strategic partners, clients and competitors at the same time.
But the road remains bumpy for this Bank-Fintech collaboration.
Competition with Fintechs is on the rise….
On the one hand, some Fintechs have become too big to collaborate and are really entering the competitive space with incumbents. Neobanks continue to acquire new clients at all costs. They are not too worried about their profitability, thanks to the help of a buoyant VC activity*. Lending platforms are trying to short-circuit the banks in the SME financing space. Large infrastructure providers in the Open Banking, such as Adyen and Klarna, are more and more keen to directly attract e-commerce merchants and marketplace, in open competition with incumbents.
(*) VC activity is changing
In more difficult times such as during the Covid-19 crisis, VCs are concentrating more and more of their investment activity on mature players rather than Seed or Series A funding rounds. In addition, mega-rounds of funding are on the rise, to support these mature players with high cash burn rates who are under pressure by the same ongoing economic uncertainties.
….while banks are looking to reinvent their way of working with Fintechs
On the other hand, traditional banks continue to look for ways to interact effectively with agile players who may not always meet bank standards for data security, making it more difficult to integrate as an extension of bank services, but who could adapt extremely fast to new opportunities.
Large organizations have often treated them as another type of vendor, going through their existing procurement process and complex approval mechanism (going through very strict function validation such as compliance, IT security or data protection). Shortcuts and rapid onboarding could be dangerous and may expose incumbents to major cyber breaches. At the same time, these obstacles have hampered progress in this collaboration, causing Fintechs to work less effectively or enter the market with significant delays, and not reaping the full benefits of their solutions.
We all expect the relationship to mature over the next few years. Fintechs will continue to drive the digital transformation of the banking sector. Banks will continue, for specific services and niche products, to rely on agile partners to better service their demanding customers and nurture intimacy.
The experience gained over the last couple of years will surely help banks to accelerate the onboarding process and improve the due diligence. These collaborative trends could develop into becoming solid partners with clear(er) roles and highly valued expertise. Having clear KPIs and financial advantages will support the mutual benefits of these partnerships.
Long is the road, hard is the way, great will be the reward.