With 2017 around the corner, the financial services industry is way past the stage when technology startups and financial institutions are perceived as competitors, comprising an existential threat to one another. The year ahead is expected to accelerate and strengthen the collaborative culture in forms of mutually beneficial, balanced partnerships, in which technologically compatible and aligned with their vision companies will work together for a larger good.
Outlining some of the benefits that partnerships can bring to each party, CGAP emphasizes that as challenges by tech-enabled competition mount, banks are seeking to link up with startups as they see opportunities to reach new markets, bring down costs, and/or enhance their service offerings.
Startups offer agility, a proclivity for risk-taking, and a disruptive mindset. Startups can also offer banks the tools they need to serve lower-income customers that would be difficult to serve within the confines of their traditional banking models.
At the same time, many startups need access to customers and financial resources that banks can provide, because, the organization notes, banks already have the customer scale, comprehensive product portfolio, robust infrastructure, deposit insurance, branding, and experience/expertise.
The combination of these strengths can be especially enabling when seeking out previously unreached population segments because the business models for serving those segments often depend on technologies that bring down costs, experts from CGAP note.
Opinions of the benefits of collaborative culture are widely shared in the professional community. Thus, the FinTech Disruptors Report 2017 by ACI Worldwide adds to the reasons why startups should make it an imperative goal to seek partnerships with banks, among which are ownership of customer channels and interactions, access to customer data, customer trust, regulatory monitoring and reporting, customer service and operations processes, fraud and security management.
Indeed, banks are armed with history lessons, experience and long-standing relationships – often going back through customers’ lives or even into previous generations. No challenger bank or any other FinTech startup has that bond with its customers as large financial institutions have.
As a result, banks were able to accumulate a vast amount of insightful data. While banks are not always able to look at that data from a fresh perspective, startups can bring something new to the table – an innovative approach to driving insights from smart data. Nonetheless, as experts from BBA suggest, “The vast pool of customer data that can be derived from such interactions means banks can understand more accurately what customers are trying to achieve, and use digital to interact with them in a more meaningful and relevant way to help them make good financial decisions.”
Some of the most explosive FinTech ecosystems globally are expected to fully leverage the opportunities that a collaborative approach opens up to all parties. China, in particular, has learned its bitter lesson with Ezubao and now P2P lenders became more willing to collaborate with banks to restore and improve the credibility of their platforms, seeking out conventional banks to conduct all financial transactions and hold investors funds on their behalf.
While China’s ecosystem went from competition to collaboration learning from its own mistakes, professionals from Moody’s have addressed the same problem, emphasizing the importance of such transition, suggesting that tie-ups between marketplace lenders and banks can benefit small businesses. Most importantly, as stated in the official press release, “the partnerships that small business marketplace lenders (MPLs) are forming with banks could help them lower their non-credit costs by cutting customer acquisition costs and funding costs. <…> Banks could benefit from the tie-ups by increasing their lending volumes and speeding up their review and approval process for clients.”
Financial executives in other parts of the world are also open to partnerships as they seek to evolve traditional sector by all means. In fact, a recent survey of US executives on the matter found that at 81% – the overwhelming majority of regional and community banks – are currently collaborating with FinTechs. In addition, 86% of regional and community bank respondents said that working with FinTech startups is “absolutely essential” or “very important” for their institution’s success.
The study also revealed that executives are optimistic about future collaboration between the two industries, with 54% of bank respondents calling FinTechs a potential partner and 89% believing that partnerships between the two will reign in the next decade.