Over the last decade, there has been a significant change in what clients want from their financial service providers due to an emerging digital-first landscape. Not long ago, firms would pride themselves on building internal proprietary solutions – as it has historically earmarked their firm as leaders in the space. The shift toward partnering with these firms is now the new norm, like a prize fighter on his last legs about to take a knockout punch, these firms must adapt or risk losing it all. Studies suggest that nearly two-thirds of banks, and credit unions, have entered into at least one FinTech partnership over the past three years, and 35% made an investment in a FinTech demonstrating the continued success these firms see in working together.
While partnering with a FinTech can help a firm scale their digital capabilities, they must understand the nuances of these partnerships or, like the prize fighter, risk taking that knockout punch.
Some of the major drivers of this culture of collaboration are innovation, speed to market, and acquisition of a digital-native clientele, as well as competition with big tech venturing into the financial landscape.
FinTechs bring with them an experience that most incumbents lack – innovation in technology. As technology becomes a major player in all aspects of human existence, customer acquisition and retention are largely affected by the digital solutions incumbents provide. Baby boomers are retiring, and there is a transition of wealth into the hands of Gen X and Millennials. This demographic demands an exceptional and transparent digital experience. As for Gen Z, they have grown up as digital natives and have higher digital capability expectations from their financial providers.
In a traditional financial landscape, incumbents have been competing amongst themselves to provide better solutions to their existing clientele. However, as big tech forays into this area, speed to market and innovation has become key for legacy institutions. Amazon’s foray into small business lending, Apple’s entry into payments and consumer finance, or Facebook’s announced launch of Libra; are all driving traditional financial institutes to partner with FinTechs in this race to the top.
Like any other alliance one might come across, both banks and FinTechs have specific objectives which drive the types of partnerships they enter with each other.
The Clark Kent: Private label solutions and partial outsourcing
To open new product offerings, banks buy / lease underlying FinTech technology or missing expertise and put its branding on the product to offer an end-to-end solution.
The Collector: FinTech Investment and Buyout
The more traditional approach would be for banks to purchase the rights to the technology, buy out the company, or invest in FinTechs that are mission aligned with the bank.
The Brotherhood: Referrals
Referrals can happen both ways – bank referring customers to FinTechs and vice-versa. This is a revenue earning model where banks can earn by referring customers to a FinTech in case the bank has a gap in their service. On the other hand, banks can also purchase customer leads, accounts, or loan assets from the partnering FinTech.
The Marketplace: Bank Model Partnership
In this approach, banks serve as the lender/account issuer in the FinTech ecosystem. Here, the FinTech owns the entire technology solution while the bank holds the ownerships of accounts.
The core of bank-FinTech collaboration lies in technology. Integrations with internal and third-party systems are critical to running an efficient operation. Flexible APIs and an extensive library of on-demand data interfaces to integrate platforms across the enterprise and an open, vendor-neutral architecture to connect with virtually any platform or counterparty are some key technologies incumbents need to invest in for a smooth integration.
Let's take the wealth management ecosystem for example.
Financial institutions tend to own the omnichannel client experience to provide a seamless journey for the client. However, APIs play a significant role in integrating with key functionalities like account aggregation, money movement, Monte Carlo simulations, financial modeling, etc. A lot of these underlying functions are proprietary to FinTechs to maintain market differentiation.
Other technologies affecting the wealth management landscape are Distributed Ledgers for cross border transfers and AI-driven regulatory compliance and fraud detection. Large scale monolithic software, like OEMS and CRM systems, are moving to the cloud and being accessed via SaaS solutions. There are countless examples of how technology is shaping this ecosystem.
Incumbents need to ramp up their own technical capabilities to take full advantage of these innovative offerings and be on par with the market.
Firms that want to win in the redesigned market must make a bold move forward and jump into the chaos of technological disruption. Create new partnerships, understand the emerging customer base, and embrace innovation to create a new wave of offerings.
Digital transformation is not just a technical challenge but a cultural journey for the future in financial services.
This article is part of a series exploring the world of wealth management and how different players are getting ahead of the competition through expanding their digital capabilities.
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