One of the biggest trends in the banking sector at the current time is the rise of new, digitally-focused players looking to compete with traditional legacy banks. These financial technology, or fintech firms, have often been seen as a threat to legacy players, but there’s an increasing recognition that they can also present huge opportunities, if banks are able to effectively collaborate with them.
The need to work together
Like it or not, legacy banks will have to work with these fintechs in the coming years if they’re to be successful. As countries round the world push towards ‘open banking’ approaches, for example, traditional players will be expected to integrate more closely with fintechs and share greater amounts of customer information.
The EU’s forthcoming Payment Services Directive 2 (PSD2), for example, will see the creation of new payments service providers, enabling authorized third-parties to access accounts and initiate payment transactions on a customer’s behalf. This could mean fintechs coming between banks and their customers, so financial institutions may look to initiate more formal partnerships in order to ensure they are not left out, as well as offering them access to new business models.
With regulations such as PSD2 likely to create both risk and opportunities for banks, being able to work in close collaboration with fintechs will be vital to success. Fintechs are more agile, higher risk tolerant and closer to what consumers want. But not all banks are ready, or even willing, to do this.
Concerns remain about fintech collaboration
A recent report from law firm Simmons & Simmons, for example, sheds some light on the questions banks in the Asia-Pacific region have about working more closely with these new players. It found that while 92 percent of respondents expect to collaborate with fintech firms in the next 12 to 18 months in order to address a gap in innovation, there is much debate about what form such initiatives should take.
For instance, while around three-quarters of banks say that forming industry consortia will play a key role in advancing new digital technologies such as distributed ledgers, 65 percent would favor working on their own initiatives, rather than taking part in industry-led cooperatives.
Concerns about these types of arrangements include worries about the high number of participants and a lack of alignment between companies. Consequently, there is a belief this will lead to a loss of control and competitive advantage for individual banks under the group’s direction.
The key barriers to fintech innovation
Simmons & Simmons’ highlighted several key risks that will have to be addressed if banks are to make working with fintechs a success. For instance, the potential cyber security questions raised by sharing data with third parties was named as a worry by 71 percent of respondents, while 51 percent raised issues about the regulatory status of potential partners, and 48 percent preferred to use their own intellectual property when rolling out digital services, rather than have to rely on licenses.
Acquiring fintech firms outright may be seen as one solution to this concern, though it does come with its own issues, such as the need to integrate different technology into their legacy ways of working, and aligning different organizational cultures. At present, fewer than a third of innovation leaders in the banking industry (31 percent) rate their approach to fintech acquisition as highly effective. This figure falls to 23 percent for the rest of the industry
This suggests that banks may need to devote more time and resources towards this area if they are to successfully gain competitive advantage in the current digital environment. Ignoring the rise of the fintechs won’t be an option, so how they cooperate will likely separate the leading players from the laggards.