Various traditional banks have understood that collaborating with fintech firms can help them harness the potential through a collaborative plan. It is necessary to bridge the gap between what traditional banks presently deliver and what customers expect. Now is the right time for traditional banks to brush up their techniques from the front end to the back end for offering the best consumer experience.
How can FinTech Collaboration Help Financial Institutions?
Collaboration between financial institutions and FinTech firms can help achieve global financial empowerment. New benchmarks in digital economic performance leverage network effects, cross-sell and upsell strategies, digital customer acquisition across channels, and behavioral models. These have been led by challenger banks and with technology players who have transformed the rules of the banking game. Delivery mechanisms for financial institutions are decoupled from incumbent banks, for the first time in history, which leads to a revolutionary movement for online platforms and FinTechs.
Role of FinTech Collaboration in Helping the Future of Banking
As per surveys, it was discovered that 14% of consumers turn to their banks for financial help after some life events that affect their finances. The main reason why customers usually seek out help and advice from conventional financial institutions is that they have trust in such institutions. On the contrary, the level of trust consumers have for technology companies is usually much higher than for financial institutions.
The evolution of the processes people manage financial and banking services additionally highlights one of the primary causes of why banks and FinTechs need to work collectively. Here are some of the technological transformations that have affected the banking behaviours of customers:
- The development of cloud: Due to cloud data can be readily accessed from any gadget that can be connected to the internet. It indicates that people can access their financial details from anywhere, plus the financial data additionally updates in real-time. Earlier accounts would require to settle overnight before they incorporated the most up-to-date data. With the advent of the cloud, it has facilitated speed transactions along with easier access.
- Increased utilization of mobile gadgets: 81% of adults within the United States own a smartphone, and higher than half of them owns a tab. The percentage of smartphone owners within the US jumped by 46% from 2011. Now, more and more people own mobile devices, plus they are utilizing them more and more. Among the US adults, 17% excessively use their mobile phones for internet access. Financial Institutions that look forward to connecting with consumers need to be considering processes to make the services and products they offer mobile-friendly.
- Enhanced accessibility online services: While various people still go to the physical branch of the bank when they are required to use their financial organization services, many people also choose online banking utilizing it for transferring money between different accounts, tracking the transactions and depositing checks. For some people, online banking happens to be more comfortable because it can be done anytime and anywhere. In most cases, banks provide customers with special benefits for getting them to utilize online services like waving accounts or overdraft fees.
Reasons why Financial Institutions Must Consider a FinTech Partner
Unlike tech giants, leading FinTech firms are likely to collaborate with financial institutions for their benefit. Alternatively, fintech organizations have turned out to become facilitators, serving as tech partners and not challengers. Both FinTech and banks are committed to providing the best experience of banking to the customer; however, those collaborations can even build a better experience by uniting, other than operating alone. There are multiple hosts of benefits for why financial institutions need to partner with fintech organizations. We highlight the six of them below.
- Opportunity cost
Financial institutions spend a lot of time attempting to justify internally. No matter whether it comes to building or buying technology, this will turn out to be harder for justifying over the upcoming years. Various financial institutions brainstorm ideas from years regarding technology and FinTech firms without providing the results for the target consumer.
Meanwhile, these incumbents attempt to learn as much as they can regarding technology. However, in truth, by this time, they could have applied the technology much quicker and been pretty cost-effective by collaborating with a FinTech partner. Licensing technology, other than developing it internally, provides the financial institutions with more flexibility, additionally, along with the capacity to reject a process when proved wrong.
- Risk-averse culture
A FinTech organization moves quickly, not bothering too much regarding regulation, and comes with a risk-averse culture that might lead to most of its officers feeling uncomfortable. Financial institutions need to be cautious that their regulatory risk, legal and compliance partners do not destroy the enthusiasm and advantages of the FinTech collaboration. They need to learn from the risk-averse culture of FinTechs they work with. Also, getting all the required support from essential internal stakeholders for providing the partnership with lots of latitude for delivery integration and solution architecture is equally essential.
- Technology gap
In most cases, technology gaps are likely to become surfaced. It is one of the reasons why financial institutions need to collaborate with FinTech firms in the first place. FinTech organizations come with the benefits of being free of regulations and legacy technology systems, which signify the primary limits for innovative digital developments of conventional financial organizations.
Due to this, FinTech organizations can develop customer-centric products and services more effectively. It is something that threatens the status quotient of financial institutions. Moreover, FinTech organizations come with up-to-date knowledge and technology regarding the core elements they are utilizing within their solutions. As a result, FinTechs and financial institutions need to make sure that there remain clear expectations regarding how to fill the technology gaps. Financial institutions may be needed to develop an API, as such, or a FinTech partner might need to extend and modify its stack for integrating with the existing architecture of a bank.
- Procurement workload
Bank procurement departments attempt to choose contracts that have earlier been approved internally or drawn up in the bank. This is because new technology or scopes will require much lesser approval times for their partners as compared to new contracts.
In most cases, additionally, when a FinTech organization comes to a financial institution with its technology stack, it will likely remain in the cloud. By this, it indicates that data storage, uptime performance, residency and cybersecurity will all act as the domains of the partner. After coming up to the final agreement, a contract with accurate service level agreements with the procurement workload, technical partners for adding new technologies or scopes, can be decreased to technical reviews and work orders only.
- Flexible regulation
Collaborating with FinTech organizations that provide cloud-based artificial intelligence service enables banks to cross-sell offers and contextual recommendation with real-time integrations via mobile. However, how does the organization meet the regulatory demands for every nation where it’s possible customers work?
Based on which nation the financial institution is in, and the regulator it is approved by, there might be a breach with present regulations. For example, the partner might not be capable of deploying within the cloud, information residency may surface as a problem, or the regulator might still need actual signatures from consumers accepting products from the financial institution. But, regulatory compliance need not be a deal-breaker because it is utilized to remain for financial institutions. Presently, more FinTech firms are working with regulators and central banks to prototype innovative technological approaches working around the present regulations, establishing regulatory sandboxes for testing their innovative offerings.
- Long term focus
For financial institutions, return on investment horizons for projects related to technology appear to be pretty short. An 18-24 months payback was the most popular scenario. In most cases, this short horizon signifies a source of contention while adopting innovative partner technologies.
Short term return on investment concentrates on underwriting internal business cases for derailing collaborations before they start. It does not indicate that financial institutions need to write off investments with innovative technologies, but, return on investment requires to be measured by various key metrics, softer than additional general IT projects. Such metrics may incorporate brand equity from organizations with the FinTech, out of the box thinking capabilities, acquisition of innovative skills on developing platforms, or the capability to experiment with innovative technology for establishing feasibility.
When FinTech and financial institutions partner up, they can leverage recent transformations in the use of technology and behaviour and capitalize on the greater levels of trust that consumers have in technology to provide such services that effectively engage with customers.
All good partnerships need a bit of giving and take. With the case of bank and FinTech partnerships, every company usually possesses something the other needs. Banking FinTech organizations usually come with ideas for a better product and service to provide, while conventional banks provide regulatory compliance and familiarity with regulations and financial rules.