Fintech has come a long way over the past decade. At one point a mild threat to traditional financial institutions, it has now proved its worth and is receiving the recognition it deserves.
Banks are facing a shift in consumer behaviour that demands better services with 24-hour access and instant responses. Fintech startups have the technology to address these concerns swiftly, making them exceptionally valuable to the banking sector. The result is a growing drive by traditional financial institutions to collaborate with fintechs for mutual benefit.
However, these types of partnerships can come with risks, so it's important to consider all aspects before making the leap. Technology is often a double-edged sword, offering quick fixes to serious issues without making the full scope of its impact immediately obvious.
The benefits of a fintech and banking collaboration are more clearly understandable than the risks. Some of the most obvious advantages include:
Access to technology that can save time and money for both banks and their customers
One of the most pressing reasons to partner with a fintech is gaining access to some of the best and brightest minds in the financial sector. This is pertinent to any financial institution that hopes to compete against the onslaught of fintech startups that are taking the world by storm.
Combining strong fintech knowledge with traditional, well-established financial services could give a bank the competitive edge it needs to re-establish a solid footing in the modern financial climate.
There is no question that fintech apps have taken the world by storm over the past few years. From basic mobile payment services to full-blown online banks like Revolut or N26, fintech has found its way into the mainstream and made the lives of millions easier.
Now, with a new knowledge of what's possible, customers are asking why their banks can't provide the same services. To keep up with demand, banks must be able to compete with this ever-evolving technological revolution.
The ability to provide new and improved services to customers
Fintech not only makes banking more easily accessible in a digital format - it also provides access to a wider range of previously inaccessible financial products. The Open Banking protocol, in particular, has introduced an assortment of new opportunities to the banking sector by connecting different financial services from around the world.
Fintech has also opened up access to alternative forms of money, including cryptocurrencies, digital tokens, and other online payment methods. The growing trend to make money transfers cheaper and faster is a driving force in the next revolution of banking technology.
Increased security against fraud and identity theft
Online services allow instant access to digital identities and the ability to quickly and easily verify account ownership. Mobile phone apps have helped to secure accounts and avoid fraud through methods like 2-Factor Authentication (2FA) and facial recognition.
Most banks have already implemented these technologies to some degree, but fintech startups are constantly developing new and innovative ways to improve security. With hackers becoming more advanced by the day, cybersecurity is now a bank's first bastion of defence against crime.
Gain access to a new wave of younger customers and a wider global market
Fintech banks are onboarding younger customers because of their appealing apps and simple account creation process. Many of these young people will probably become lifelong customers, so it's vital for big banks to offer equally attractive services.
New fintech innovations that support quick and easy digital onboarding include advanced facial recognition and identity verification technology. Gone are the days of visiting a bank branch to open an account - nowadays you must be fully online to compete.
Fintech and banking partnership risks
All this sounds like the start of an excellent and long-lasting relationship that should be beneficial for the fintech and banking sectors. So what possible downsides could there be?
Lack of adherence to regulations and compliance
The speed at which fintech products have entered the global market has left regulators scrambling to draw up sufficient legislation. While some fintech startups can get away with skirting these legal considerations, big banks need to be more careful.
Now, lawmakers around the world are stepping up to investigate new fintech relationships that threaten to disrupt the global economy. Strict adherence to compliance and regulations is a cornerstone of the banking sector, so if clear legislation is lacking, it's best to err on the side of caution.
The introduction of the 'regulatory sandbox' approach has helped mitigate some risks associated with fintech integrations. It separates the fintech side from the banking side of a business, promoting unrestricted tech innovation while maintaining strict financial regulations.
Potential to damage existing relationships
There's always an inherent risk associated with introducing new products to longtime customers, and when money’s involved it's particularly high. New fintech products run the risk of creating a disconnect amongst older customers resistant to modern technology.
It's just as important that you maintain existing relationships as it is to build new ones. Any minor security breach could send wealthier customers running for the hills, fearful of the flaws often present in new technology.
In 2014, lack of sufficient security checks at fintech startup Venmo resulted in account hacks and thefts from several user accounts. Even though things have vastly improved since, those customers may never trust any fintech application again.
Inability to properly secure customer data
In order for most fintech applications to operate, they require a consistent connection to customer data. This means there is always potential for a data breach, no matter how strong your network security is. Even with a 'regulatory sandbox' in place, it's often impossible to have a workable situation without readily available data that can be accessed over the Internet.
As recently as 2019, credit card giant Capital One suffered a major breach that saw 100 million customer details stolen, including names, addresses, birthdates, and contact details. Even without sensitive info like passwords or account numbers, hackers could potentially use this information to take ownership of an account.
As is usually the case, the most exciting and promising developments come with potentially devastating side effects. Without question, all traditional financial institutions will have to implement fintech services if they hope to stay relevant. However, to do so without adequate due diligence and regulatory considerations could spell disaster.
Enlisting the help of a third-party business intelligence firm to oversee the finer points of a new partnership will help reduce these risks. With the help of experts in risk assessment and due diligence processes, you can enter the process with confidence and peace of mind.