Commercial banks need to innovate to keep pace with customer demands, and many will be looking to fintech partners to help deliver improved service and value.
However, how do executives view these partnerships, the challenges the participants will face and what the future for fintech-based ecosystems will look like?
61% of our survey respondents revealed they had some kind of third-party solution in place. But 66% admitted that less than a fifth of their annual budget was being invested in fintech solutions. This is set to change, with 46% insisting they would be increasing their investment significantly and a further 31% would do so, if only slightly. There is every reason to believe that fintechs will be helping commercial banks drive a sea-change in their customer experience. It’s not a prediction. It’s happening today.
How heavily does your business rely on third party-party fintech solutions and providers?
How much are you currently investing in fintech?
Do you see the investment in fintech increasing in your organisation over the next three years?
Nearly three-quarters (73%) of survey respondents agreed that the fintech community presented ideal opportunities for partnership. A very small number saw fintechs as an actual threat. While it’s true that many have been at the vanguard of defining the next generation of customer banking experiences, traditional banks continue to play a vital role.
Typically, these partnerships allow larger banks to access smaller customer groups effectively. This is the case for Santander, which, through partnering with small business lending fintech, Kabbage, has accessed a seam of customers that it might not otherwise have reached, and at the right cost.
Fintech for you is… (select all that apply)
What partnering with fintechs can deliver
Speaking to BankNXT, Jonny Davis, vice president of global client management – partnerships at Fraedom in San Francisco, said: “The rapid rise of fintech provides opportunities for commercial banks to fulfil market needs and plug gaps in their service offerings. It’s about identifying key, digital-driven services that will help retain customers and encourage new ones to join, not give customers a reason to abandon ship. For example, the ability to offer card expenditure and balance transparency could improve card delinquency rates, therefore reduce risk and costs for issuing banks. It’s a simple, yet powerful service that can be tagged on to an existing business with minimum overhead.”
New products and services are definitely the hot tickets as far as traditional banks are concerned, with 81% citing this as their reason for building partnerships. Naturally, accessing new customer groups (65%) or creating new product streams (81%) is seen as a growth lever so it follows that 73% of respondents also believe fintech partnerships will increase revenues.
Do you see partnering with fintechs as an opportunity to: (select all that apply)
This implies that fintech partnerships aren’t a point of differentiation anymore – everyone is or shortly will be doing it – they are the cost of entry. And failing to adapt to a fintech-powered future could be nothing short of catastrophic for less enlightened brands. Some have suggested this is because the fintechs themselves, particularly in the consumer space, will be responsible for the death of the traditional banks. But this is not the case. It will be by refusing to capture the zeitgeist of ‘digital first, customer first’ that undermines their own competitiveness. Our survey results also reveal that fintech partnerships are likely a ‘do or die’ situation for traditional commercial banking providers. Improving customer satisfaction is seen as vital (84%), and so is reduced operational cost when margins are everything (84%). Yet barely half (53%) of respondents see such partnerships as a way of differentiating themselves from the competition.
Accessing fintech support
Many survey respondents acknowledge that, without fintech support, this brave new world is inaccessible to traditional banks. Raconteur quoted Ewen Fleming, partner and financial services leader at Grant Thornton, who said: “Most UK banks systems are so old-fashioned they’re only able to relaunch their digital apps once every quarter. If they’re serious about emulating the tech firms, they need to be able to do that every day.”
Some of the things that are holding commercial banks back from adapting to new customer needs are the same reasons they give for not making fintech partnerships. More than half (54%) blame legacy technologies and security concerns for their hesitation.
What, in your view, is the biggest barrier to partnering with a fintech? (select all that apply)
This indicates commercial banks misunderstand how fintechs have developed their propositions. Many are constructed based either on APIs or software as a service (SaaS) in the cloud, providing almost immediate, secure access to new capabilities.
As reported in The Irish Times, “Investments in cloud technology can provide digital automation throughout the entire institution while creating an infrastructure that is agile, transparent and secure. The cloud’s benefits are not dependent on a bank’s size and scope – it levels the playing field for institutions of all sizes. These providers encrypt data, monitor system activity in real time, employ a host of software and hardware tools to defend their networks and back up user data.”
Critically, almost half of respondents also identified a lack (46%) of relevant expertise within their own organisations. You might argue that the purpose of entering into fintech partnerships is to rely on third-party expertise. However, a degree of in-house knowledge is needed both to acquire and orchestrate this third-party ecosystem. Commercial banks have an immediate imperative to upskill.
Some banks are showing their commitment to investment in fintech by not only buying their products but fostering education in the sector. Annamaria Jatta – Programme Lead, Solutions Team (RBS), revealed how the UK’s NatWest bank is supporting its business customers by partnering with the Department of International Trade to host more than 50 fintech companies at the European FinTech Mission Conference.
“We welcomed the latest in fintech innovation from around Europe to give them an opportunity to meet and collaborate with each other, and show them the benefits of working here in the UK. Innovation is about being good at listening and paying attention; to spot the patterns that tell you which new products or services are solving a problem. To do this we look at which fintechs are out there, what they’re doing, what we can learn from them and how we can work together.”
Business and technology advisor, Graham Seel wrote a guide to choosing the ideal level of partner support in Finextra, suggesting banks can choose from six scenarios:
- Standalone in-house solutions: Rare, particularly in larger banks
- Integrated in-house solutions: Hosted by larger banks; Software as a service (SaaS) in smaller operations
- White label solutions: Fintech takes on responsibility, product carries full bank branding, seen as bank product
- Full outsourcing: Back office services, additional services, non-customer facing
- Apps & Add-ins: Specifically add value to mobile banking experience; integrated in-app, additional app or widget
- APIs: Allows flow of information back and forth, access to data and transaction capabilities; mandatory for EU banks.
Commercial banks may choose to adopt one or more of Seel’s suggestions. But it’s no longer a question of ‘if’, but ‘when?’ From Open Banking to digital advances, mobile workforces and more, the need for commercial banks to meet and exceed the experiences their customers have in their personal finance lives has become an imperative.