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Perspectives

Fintechs and Banks: Creating the Next Generation of Banking, Together (Part one of a two-part series)

2019-05-08


Lurking behind the tussle for greater market share between banks and fintechs is the fact that, independently, they both fall short of the competencies necessary to meet savvy consumers’ rising needs. Their paths need to converge if both want to create meaningful and lasting outcomes.

With global fintech funding exceeding $111.8 billion in 2018 alone and growth spreading across practically all banking and financial services segments, these companies continue to present an array of opportunities to the overall banking industry.

Historically, fintechs have occupied segments with relatively low barriers of entry such as payments and personal finance, promoting their advantages in customer experience, technology and affordability. Meanwhile, banks continued to differentiate in segments that demand high investments, are regulation-bound, and are limited by the domain expertise of people — all indicative of high entry barriers.

But the landscape is rapidly evolving, and fintechs are traveling upstream. For instance, a growing number like SoFi and Square are entering into markets such as investments, cash management, and compliance while early entrants like Stripe and Braintree continue to strengthen their positions in segments such as payments.

It is clear that three types of fintechs have had a major impact on the banking industry: which we have defined as maturing, emerging and mainstream fintechs. With rapid expansion of consumer access through digital channels, and regulators opening the door for fintechs (e.g., seeking federal charter), the competition from here on is only going to intensify.

Part 1 of this two-part series looks at why the paths of banks and fintechs should converge. Part 2 will look at how the two can forge successful partnerships.

Both banks and fintechs are arguably fast in their approach to protect and grow amid such competition. As a result, two distinct paradigms are emerging. On the one hand, banks are rapidly pursuing fintech partnerships to power their innovation arms; on the other hand, fintechs are aspiring to develop national scale and expand into a wider spectrum of products and markets where they traditionally refrained from or operated at a minimal scale.

Banks pursuing fintech partnerships

With fintechs rapidly expanding their customer base beyond retail customers, banks see an opportunity for finding potential partners. That trend, coupled with the need for technology-led customer centricity is pushing banks to shift their approach from integrating fintechs’ products on a piecemeal basis to building strategic partnerships, with tighter offering synergy.

  • Case in point, Radius Bank has been aggressive in establishing long-term partnerships with fintechs to tap into the millennial buyers. The bank collaborated with an investment firm Aspiration to provide checking accounts for Aspiration customers and partnered with the lending company Prosper Marketplace to offer new loan options through the Prosper platform.

  • Similarly, JPMorgan Chase partnered with Roostify, a mortgage provider, to launch a digital self-service mortgage platform for end-to-end streamlined processing of home loans.

  • Last year, Wells Fargo announced a partnership with Blend Labs, a San Francisco-based mortgage fintech to make the application process simpler and faster.

  • Citigroup recently partnered with HighRadius, an accounts receivable automation fintech, to launch Citi Smart Match.

Increasingly, large parts of a bank’s business lines have some level of fintech engagement focus spanning both emerging and maturing fintechs.

Fintechs go mainstream

Even as banks continue to explore such partnerships, fintechs of all sizes, including SoFi, Square, and Lending Club are lobbying hard for national bank charters. They are also inviting banks to partner with them for two reasons: to gain the ability to operate at scale, and to address compliance requirements from U.S. state and federal agencies.

Kabbage, a leading financial technology company drove several partnerships with banks to attain scale and is now leveraging its technology and data platform to extend products that match that scale. Some of the key partners of Kabbage include MasterCard, Experian, Santander UK and Scotiabank.

Another example is Mpower Financing, which provides loans to foreign students at U.S. universities, which grew from three U.S. states to 14 and then eventually to 50 in just a couple of years, benefiting from a licensing-based expansion approach.

Despite these moves, standalone fintechs appear to lack the necessary scale, regulatory rigor, operational expertise and, oftentimes, the brand equity to tap into a large number of customer segments and geographies. They need partnerships with established banks and major financial institutions to build credibility, earn the trust of the regulators as well as some of the customer segments, and achieve economies of scale.

With these two paradigms emerging rapidly, there is both good and bad news. The good news is that both banks and fintechs have a strong appetite for partnership in their own ways; however, their growth aspirations and control mindset may negatively influence such appetite. The pivotal considerations for fintechs are to identify the right avenues of convergence, and a right partnership structure that complements each other’s strength in order to build a synergistic growth model.

The need for creating lasting partnerships

Practical shortcomings such as scale (or lack of it), talent type, technology adoption and pace of innovation continue to hound banks and fintechs as they aggressively pursue their agendas that include leading portions of the market and capability augmentation. The best way forward can be achieved, in our view, when both banks and fintechs smartly collaborate instead of challenging each other’s position. 

A lasting partnership is not always an easy undertaking. This is primarily due to differing business visions, operating characteristics and cultural makeups of each side. For instance, a traditional bank’s offerings are extended to clients through a range of products, services and bundled solutions processed through elaborate due diligence, expert assistance and, oftentimes, long correspondence cycles.

At fintech firms, productization and customer journey are at the core of every offering, such as a platform, service, distribution or any other means to do business. Decision-makers need to craft a steady path for collaboration that enables both parties to become successful.

Most banks that have successfully engaged fintechs typically shift their mindset from individual line of business offerings to platform-based customer journey orchestration. Figure 1 explores the distinct characteristics of banks and fintechs and possible avenues of convergence.

Source: Cognizant analysis

Figure 1

As banks and fintechs work more closely and focus on data, machines, and computing solutions for delivering the next level of customer experience, their workforces must transform in sync. Current domain specialists, personal bankers, regulatory experts, economists and operations support personnel need to be reskilled into innovator roles in their own capacities to successfully collaborate with a fintech’s tech savvy workforce.

Similarly, fintechs need to rethink solutions that are built for scale, under higher security considerations, have stringent regulatory surveillance and bring structure to everything that they build. A critical demand for banks is that they need to plan for advanced technology reshaping the next-generation workforce.

Part 2 of this series will take a deep dive into the how banks and fintechs can create successful partnerships, and the key factors to be mindful of.

For more, visit the Banking & Financial Services and Digital Business sections of our website, or contact us.

Philippe Dintrans, Senior VP; Amit Anand, Assistant VP; Madhu Ponnuveetil, Senior Director; Siddhant Dash, Senior Manager; and Elias El-Wadi, Manager, at Cognizant’s Banking & Financial Services Consulting Practice contributed to this article.

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Fintechs and Banks: Creating the Next Generation of Banking, Together (Part one of a two-part series)