There’s been talk for years of fintechs disrupting banks. But the reality is that banks and fintechs depend on one another more than they compete.
Fintechs rely on banks for the foundation of their offerings, and banks rely on fintechs to provide their customers more modern capabilities and experiences. Both parties have a lot to gain in working together.
After 2008, banks were too busy dealing with the fallout of the global banking crisis to keep up with digital transformation. They had to focus their resources on a slew of new regulations. This made them ripe for “disruption.” Consumers expected their banking experiences to resemble their experience with other everyday services—whether it was Amazon, Facebook, Google. It was easy to believe a new wave of nimble startups would step in and take business away from banks—and even displace banks altogether.
Yet, more than a decade later, banks are still very much here. The fact is, fintechs don’t replace banks. In most cases, they simply provide a more efficient way of doing things, such as onboarding customers, paying for goods, or moving money across the globe. Under the hood, most fintechs still rely on traditional banking services. Consider payments. As cash and check-writing go out the door, there is no shortage of payment startups competing for a piece of one market segment or another. Yet banks still touch most payment transactions today in some way, shape or form.
Despite their reputations for being slow and stodgy, banks still bring a lot to the table. They have a huge network and large, established customer bases. They are good at holding money and managing risk—and they know how to navigate the complex regulatory requirements around the world. Yet, despite that, banks recognize they need to keep up to stay relevant. As a result, most have made improving and simplifying the customer experience a top priority.
The problem is, when it comes to modernizing, banks are at a big disadvantage. They are heavily regulated, highly risk averse and bound to legacy IT systems put in place in the 1970s and 80s. This makes it more expedient for banks to stick with the tried-and-true— even if those methods don’t offer the best customer experience.
Take cross-border payments, for example. Many banks still rely on the correspondent banking system for currency exchange and money transfers. As a result, there is often a lack of transparency, delays and hidden costs for both payers and receivers. New payment companies aim to change that by building their own networks on top of existing bank rails, and using software and analytics to move money more efficiently and provide a better customer experience.
There is no doubt, fintechs bring a fresh alternative to the stagnant customer experience of banks. But they still need banks for scale and distribution. For their part, banks want to work with fintechs that have a reliable track record in terms of risk management, compliance, and regulations like Know Your Customer (KYC). They also look for volume, which means it can take years for a fintech coming out of the gates to establish a strong network of banking partners.
The good news is that banks are more open to partnerships now than ever before. In most cases, the financial services sector has found it far simpler to add capabilities from fintechs than to build those services in-house. As a result, large banks are increasingly partnering with, investing in, and even acquiring fintechs.
In late 2017, banking giant JPMorgan Chase acquired WePay. Spanish bank BBVA has been on an acquisition binge, buying up a string of digital upstarts. Last year, Deutsche Bank bought a stake in U.S. payments technology startup ModoPayments.
We’ve also seen a rise in the number of partnerships. In 2018, global payments company Flywire—the company that I lead—partnered on cross-border payments in China with UnionPay and in India with Deutsche Bank. Santander partnered with Ripple, and France’s Groupe BPCE partnered with TransferWise to offer its customers access to digital money transfer services.
In some cases, banks are extending their digital services by “white-labeling” fintech offerings and services, meaning banks offer the services under their own brand. This lets banks stay in the driver’s seat with customers, and allows them to do things, such as offer payments services faster than if they had to develop their own technology in-house. Fintechs benefit from increased volume and reach at a pace that would otherwise be impossible.
Banks and fintechs depend on one another a lot more than their marketing messaging would lead you believe. The question is no longer whether they can partner, but how they can work together to optimize those synergies for one another.