BANK PARTNERSHIPS and FINTECHS | The Essential Collaboration for a Thriving Financial Sector
“Two heads are better than one,” the saying goes. Partnerships and collaborations are vital to all sectors of business and culture. Successful partnerships help create businesses and products, allowing them to compete and thrive. One area where partnerships are proving essential is in the financial sector, particularly in the realm of bank partnerships with fintech companies.
A sea change has been happening in the banking business, with traditional banks becoming more regulated and antiquated in the face of rapidly evolving technology. Fintech has emerged as a force to reckon with, and as new generations adopt different financial transaction methods, it’s time for banks to forge bank partnerships with fintech companies to prepare for the future.
The banking landscape is simple. The Big 4 – Chase, Bank of America, Citigroup, Wells Fargo – collectively account for over $5 trillion in assets. Then there are the subcategory banks like US Bank, PNC, and State Street, with hundreds of billions of dollars in customer deposits. These financial behemoths, with deep pockets, were able to adjust to the changing banking climate and customer behaviors, automating their services faster than smaller community banks and credit unions.
Big change is well under way.
Despite their deep pockets, the Big Banks realized that partnering with fintech companies, rather than reinventing, made the most sense. Examples of successful bank partnerships include:
- JPMorgan Chase partnering with online small business lender OnDeck
- Bank of America partnering with robo-advisor Betterment
- Goldman Sachs acquiring Clarity Money
- Citibank partnering with PayPal
- Capital One acquiring Level Money
- Wells Fargo integrating Intuit’s financial management tools like QuickBooks and Mint
These bank partnerships have successfully combined the strengths of traditional banks and innovative fintech companies to provide customers with better financial products and services.
However, smaller community banks and credit unions have been slower to engage in bank partnerships, despite the potential benefits. As money gets tighter, partnering with fintech companies can enhance the survival of these much-needed alternatives to the Big 4.
Community banks and credit unions offer choices and a level of service that people desire. Vibrant bank partnerships with fintech companies can bring these banks up to the needs and expectations of the emerging customer population. As the Big Banks become less personal, automating most of their services, smaller players have a unique opportunity to not just automate where it makes sense but also provide the type of customer service that appeals to their audience.
This mutually beneficial relationship – banks and fintech – has created a new category in business to go along with SaaS (Software as a Service): BaaS (Banking as a Service). However, more changes are needed for this partnership to flourish.
According to a recent study, 74% of banking leaders still view fintech as a threat to their existence, but 77% know they will have to work with them to stay relevant. People don’t have to walk into a bank branch to conduct business anymore, and smaller banks can compete with bigger banks if their technology is as good or better, offering ease of use and delightful experiences.
Today’s modern bank partnerships are driven by trust, requiring deeper and authentic relationships where each party believes and invests in the other. Strategic bank partnerships can drive traffic to and from each other in complementary, mutually beneficial ways. We need smaller banks, community banks, and credit unions to keep the big players honest and offer customers what they crave: choice and enhanced service. This partnership will enable banks and fintech to serve their customers in ways the big banks can’t and won’t.
Bank Partnerships are a two-way street.
But for the bank-fintech partnership to be successful, both parties must carefully match their values, goals, and a genuine desire to collaborate. The key goal is to serve the customer responsibly, providing them with the technology they crave and are used to, along with the services they can also get from the Big Banks. The idea is to create a competitive and useful landscape that adapts to the needs and behaviors of emerging generations.
“FinTech’s and financial institutions have a mutual coincidence of needs. While FinTech’s have innovative flair, large, well-established financial institutions can bring customers and capital to the table. As a result, we are more likely to see collaboration – as opposed to cut-throat competition – between the two camps going forward.” — Niels Pedersen, author of Financial Technology: Case Studies in Fintech Innovation.
Big finance sees the value in bank partnerships.
Bank partnerships between big finance and fintechs are proving valuable in today’s financial landscape. Legacy institutions like American Express recognize the benefits of collaborating with fintechs for better, more efficient payment solutions. Fintechs, with their agility and innovation, help smaller banks stay relevant and competitive by upgrading their technology and infrastructure.
In fact, a 2019 Forrester study revealed that companies with mature bank partnerships experienced nearly twice the revenue growth compared to their peers. These partnerships enable brands to share resources and reach new audiences, driving mutual success.
Bank Partnerships are already taking place.
In 2021, the Federal Reserve staff met with over 40 community bankers and fintech leaders to explore different types of partnerships, identifying three primary categories:
Operational technology partnership: Banks utilize fintech-provided technology to enhance internal processes, monitoring, and infrastructure. This technology streamlines processes like loan origination, aids regulatory compliance, reduces errors, increases efficiency, and reallocates resources.
Customer-oriented partnership: Focuses on improving visible bank functions, such as account opening or deposits. Fintech partners help banks integrate applications for easier person-to-person payments, eliminating the need for physical locations and expanding deposit reach. These relationships paid off during the pandemic-induced economic shutdown. Other banks—with the help of fintech—started providing teller video chat, making it easier for customers to conduct business during branch closures.
Front-end fintech partnership: Also known as Banking-as-a-Service (BaaS), fintech firms interact directly with bank customers during banking activities, reaching customers the bank couldn’t. These partnerships require close monitoring due to increased third-party risks. Innovation should be responsible.
There’s a partnership on the horizon.
We’re still in the early stages of the fintech/bank partnership revolution. Collaboration will be an essential part of unlocking untapped potential. “These partnerships give us the opportunity to continue learning and evolving so we can help drive the fintech industry forward,” says Mohammed Badi, President of Global Network Services at American Express.
The challenges ahead are considerable but not insurmountable. With the explosion of AI in recent years, bank partnerships become even more tantalizing. Fintechs can serve banks, and banks can serve fintechs, as the concept of BaaS (Banking as a Service) continues to grow. The genie will not go back in the bottle, no matter how much Chunky Monkey awaits him.
Howard Davidson is the CMO at AlmondFinTech.