Finance technology (FinTech), challenger banks, and large technology companies (Big Tech) are setting new standards in economic and digital performance by capitalizing on the network effect, acquiring new customers digitally across channels, developing cross-sell and upsell strategies based on behavioral models, and leveraging artificial intelligence (AI).
For the first time in history, financial service delivery mechanisms are no longer bound to existing financial institutions (banks). As a result, FinTechs and internet platforms will experience a watershed moment. Companies in the technology industry, like Amazon and Apple, have unparalleled knowledge of their consumers' financial habits and deficits.
Consider Apple's secured credit card, which is intended for customers with poor or limited credit histories. This card, issued by a partner bank, offers cash-back returns on purchases ranging from 1% to 3%, as well as interest-free installments. Customers may improve their credit and eventually qualify for new things by earning cash-back incentives and using a PFM-integrated digital wallet on their iPhones.
These behemoths may now have access to a hitherto untapped market niche, which helps to improve consumer relationships with these firms. They have also built trust with their user base and are educated about the various communication formats that should be employed. By integrating this knowledge with key technological breakthroughs such as Alexa or Siri, these platforms can provide tailored banking experiences, resulting in increased profitability and financial empowerment for its users.
6 Reasons Why Banks Should Consider Collaborating with a FinTech Firm!
Unlike Big Tech and rivals, the bulk of FinTechs do not represent a threat to traditional financial institutions. FinTech firms, on the other hand, have transformed into facilitators rather than competitors through collaboration with technological partners.
Both banks and FinTech’s are devoted to providing their consumers with the best banking experience possible, but by collaborating rather than competing, those connections can provide an even better experience. The number of reasons why banks should collaborate with FinTech startups is extensive. The top six reasons for this are as follows:
1. Opportunity Cost
Banks expend a substantial lot of work internally defending their decisions on whether to acquire or build technology, which will become increasingly harder to defend in the coming years. It is probable that some banks may spend years debating FinTechs and technology without delivering results for their clients.
They might have been far more efficient and cost-effective in their adoption of the new technology if they had worked with a FinTech partner instead of striving to learn as much as they could about technology. Furthermore, rather than creating technology in-house, licensing it provides the bank greater freedom and the ability to reject a plan if it proves to be inaccurate.
2. Technology gap
In most cases, there will be technological gaps, which is one of the reasons why banks interact with FinTechs in the first place. FinTech firms, as opposed to traditional financial institutions, have the advantage of being free of legacy technology systems and regulations, which are the principal hurdles to new digital breakthroughs at these institutions.
As a result, FinTech companies may be able to produce customer-focused services or products more efficiently, putting banks' status quo in peril. Furthermore, FinTechs have more current technology competence in the critical components that they include in their solutions than traditional financial institutions. Last but not least, banks and FinTechs must set clear expectations for how technology gaps will be filled.
As a result, banks may be obliged to create an API, and FinTech partners may be forced to modify or expand their stack in order to connect with a bank's existing architecture.
3. Risk-averse culture
A FinTech firm works swiftly, is unconcerned about regulatory compliance, and has a risk-acceptance culture that would make the majority of Chief Risk Officers uneasy. Banks must guarantee that their legal, risk, and compliance teams do not meddle in order to preserve the advantages and excitement of a FinTech partnership.
They should strive to learn from the cultures of the FinTechs with which they engage and gain all of the necessary support from key internal stakeholders in order to provide the partnership considerable latitude in solution architecture, integration, and delivery.
4. Procurement workload
Bank procurement departments have a tendency to favor contracts that have already been written up or authorized internally inside the bank so that new scopes or technologies will require far shorter approval processes for partners than they would require for brand new contracts.
Furthermore, when a FinTech startup brings its technology stack to a bank, it is extremely likely that it will be housed on the cloud. This means that the partner will be in charge of all elements of cybersecurity, uptime performance, data storage, and residency requirements. It is possible to decrease the amount of work required for adding new scopes or technologies to work orders and technical reviews only by achieving a master agreement, an IT contract with adequate service level agreements with technology partners, and a technology partnership agreement.
5. Long-term focus
For banks, ROI (Return on Investment) timelines for IT efforts are frequently short, with a payback period of 18-24 months being the most common. When it comes to deploying new partner technology, the majority of the time, the short time horizon is a source of contention. Collaborations may be derailed before they begin if they are focused on short-term ROI in order to create an internal business case.
This does not mean that banks must write off new technology investments; rather, the return on investment (ROI) must be computed using alternative key criteria that are softer than those used for other types of IT projects. Brand equity earned from the FinTech association, the development of new skills on an emerging platform, the ability to think creatively outside the box, and the opportunity to experiment with new technologies to establish feasibility are all examples of measurements that might be employed.
6. Flexible regulation
By collaborating with FinTech companies that offer cloud-based artificial intelligence services, banks may make contextual suggestions and cross-sell offers via mobile devices while also integrating with real-time data. However, how can this company verify that it adheres to the regulatory criteria of each country in which its potential clients do business?
Depending on which country the bank is based in and whose regulatory body it is subject to, there may be a violation of current regulations. The partner may be unable to deploy in the cloud, data residency may be an issue, or the regulator may still need physical signatures from clients who use bank-issued credit cards or other financial products. Regulatory compliance, on the other hand, should no longer be a deal-breaker for banks, as it once was.
Currently, a growing number of FinTechs are partnering with central banks and regulators to create new technical solutions that get around existing constraints, as well as to build up regulatory sandboxes to test their new offerings before going live.
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