The fintech sector was already booming, but with increased demand for user-friendly, digital financial services, the pandemic really pushed many new and innovative solutions into mainstream use.
It’s understandable that banks could see this as a threat — drawing away customers and even potentially rendering their services obsolete. But, instead of feeling threatened, some are taking a very different approach: if you can’t beat them, join them.
Unlike the world of big tech, rather than simply acquiring them, banks like ABN Amro are looking to form mutually beneficial strategic partnerships with fintechs offering key services for their customers.
Innovations like online payment portals, mobile wallets, and peer-to-peer (P2P) lending platforms have all grown out of the intersection of technology and finance, and many established institutions are getting on board.
Whether you’re a fintech looking to partner up or a bank that needs an innovation boost, we’ll take a look at the benefits of forming these strategic partnerships and why they’re not just beneficial, but essential to overcome the challenges facing the financial services sector.
New and old challenges facing financial institutions
The pandemic showed us how traditional financial services or practices are not always cutting it when it comes to weathering economic downturn. For example, in one recent study, only 11% of small businesses said they thought their banks would help them overcome the negative impacts of COVID-19.
A study by PwC found that the biggest concerns for consumers under 40 are loss of income and being able to save for upcoming life events like education and children. They’re looking for low-cost solutions that will help them manage these financial concerns.
In a number of ways, the current financial services sector is at a crossroads. It can be easy for banks and other established institutions to feel comfortable being too large or powerful to fail, but this mindset doesn’t lend itself well to innovation anymore. An increasingly tech-savvy, smartphone-wielding generation of customers is not going to be satisfied with the status quo.
At the same time, the financial services sector — including both traditional banks and fintech startups — is facing a rise in cybersecurity and ransomware attacks and compliance with increasingly stringent regulations.
Both sides face very different internal challenges. While traditional institutions are often seen as inflexible and slower to innovate, fintech startups face a high risk of failure. But together, the two entities can combine their efforts to overcome some of these barriers.
As Hugo Bongers, Head of ABN Amro Ventures, knows these partnerships are not always easy, but they are mutually beneficial. This special branch of the bank is focused on partnering and investing in up-and-coming fintechs. According to Bongers, there are sometimes:
…cultural gaps, personal gaps, technology gaps between a startup on the one hand and a bank. For banks who decide to do this, don’t expect it to be easy and don’t expect it to be a fast exercise. It will take money, it will take time, but I think it’s worth the effort for both parties involved to make that partnership happen.
Benefits for banks
Some traditional financial service providers report that working with fintechs helps them stay current on industry trends and keep pace with what clients want moving forward. This helps them understand, not only what their customers want now, but also helps them add value by anticipating future needs.
Often it makes more sense for banks to invest in up-and-coming solutions rather than trying to do all the work themselves. Many of the problems banks and their customers face already have solutions created by fintechs. Meanwhile, these fintechs just need a boost to get their products to market. By investing in these companies, banks can take advantage of their solutions without doing all the research and development in-house.
What’s more, traditional financial institutions and large corporations are increasingly adopting the startup mindset of ‘move fast and fail often’ through innovation hubs and other industry partnerships that allow them to try out business solutions in a low-risk environment. Fintech solutions are known for being innovative, straightforward, and customer-centric, so partnering with these companies can help banks expand their offerings for customers.
A big challenge with this product development is building secure platforms for online trading and financial management. Data breaches are on the rise, and banks can’t afford to be too comfortable. Fintech companies can help banks in this respect by harnessing cutting-edge tech to provide more secure solutions. For example, many fintech companies have adopted advanced multi-factor authentication and encryption to protect financial transactions and customer data.
Benefits for fintech companies
When fintech startups fail, it’s often because they can’t get the funding or customer bases necessary to survive their first year. In contrast, banks have access to millions of loyal customers who rely on their services.
[Banks] can save fintechs millions in customer acquisition costs and years in scaling,
says Bongers. While fintech companies can help banks innovate, banks can help fintech firms tap into existing customer bases and get the traction and trust from new users they need to grow in a competitive market.
Banks also have existing relationships with investors, so if they recommend promising startups, it can help these companies get the funds they need to stay afloat. If less-established fintech companies can learn and grow from taking advantage of existing networks and gaining professional support from more established institutions, they’ll be better equipped to serve their customers.
Another way banks can help fintech companies is in their understanding of regulatory challenges. While fintech startups are currently facing less restrictions in comparison to traditional financial institutions, as they become more established, regulations will eventually catch up.
Since any company that collects user data (which is just about all financial services providers) will be increasingly regulated at the national and international level with standards like the General Data Protection Regulation (GDPR), fintech firms should look to banks for help. Many of these institutions have whole compliance departments to manage heavy regulations, so they’re well-positioned to help newcomers adapt and thrive.
This will be particularly important in the wake of the PSD2 directive which regulators are hoping will revolutionize Europe’s finance sector.
Assistance on the regulatory side, “creates direct value for the company when we open up our resources and knowledge to a specific startup to guide them through the process of getting the security up to industry standards,” says Bongers.
Fintech companies have a ways to go in providing sufficient data protection to make customers feel safe, but with the aid of institutions that have long navigated compliance and regulatory issues – coupled with the flexibility of modern technology – the future is bright for building secure digital financial services.
Looking to the future
The fintech industry is a highly dynamic market that’s leading the new finance trends of the future. Bongers shared some of the top trends he’s seeing at the moment:
I see a lot of interesting things happening in ESG climate tech. That’s a field where we strongly believe there’s an opportunity. In the investment space, stock brokerage, neo brokerage, and everything around SMEs because that’s an underserved segment for banks. For example, when it comes to neobanks for SMEs, like NEOS, where we have invested for value added services, there’s so much necessity from a market demand perspective and big opportunity as well.
It’s a competitive market, and fintech startups face an uphill battle to establish themselves and thrive. But their presence is meant to disrupt, and disrupt it has.
Banks can not afford to rely on long-established practices and customer bases at the expense of growth and innovation. Hopefully moving forward, more and more banks will partner with fintech companies to take advantage of the future of financial technology and provide increasingly flexible, customer-centric tools and services.