April 12, 2021
With the permanent increase of the Internet adoption rate during the 2010s, tech companies began to emerge in many other industries including the financial sector as well. By the end of the decade, banks started to realise that fintech (Financial Technology) companies and startups might be a threat for their businesses, hence, big financial institutions decided to invest in the development of digitalisation in order to beat the previously mentioned players. However, despite the constant innovation, banks could not stop the rapid expansion of fintechs. On the other hand, fintech companies clearly saw that they do not have the power to beat such huge financial institutions and their trustworthy brand names, well-established marketing channels and financial resources. As a result, banks and fintechs concluded that collaboration would be more beneficial than competition for both of them and they started to work together.
But how could fintechs succeed within just a short period of time? The answer lies between the banks and their customers, since younger generations often feel that they are neglected by banks and that their needs are not satisfied. Not to mention that the legacy procedures are inconvenient for them. For instance, members of Gen Z don’t have (that much) savings or disposable income, so banks cannot see the potential in them which might be a huge mistake. Unfortunately, most of the traditional banks still lack proper user experience and digital solutions tailored for younger users who will ultimately choose the more innovative, intuitive and user-centered solutions which can satisfy their needs. Nowadays youngsters, even from a very young age, have the ability and the willingness to learn about money and financial literacy thanks to the Internet and banks must start to take into account that today’s kids will be tomorrow’s leaders.
Fortunately, we can encounter some positive changes in the field of improving customer experience with the help of fintechs too. According to Finextra, in 2019 81% of banks would cooperate with fintech companies to execute their digital transformations. Moreover, the 2020 Tink survey report unveiled that 23% of banks who were asked in the report have established more than 5 fintech partnerships in order to complement their open banking strategies. Not to mention that 69% of the respondents of the survey stated that they have increased their number of fintech partnerships since 2019!
On the other hand, fintechs need to be careful and watch out for the potential challenges that they might have to face. One of the biggest issues that many fintech startups struggle with is to create reputation and recognition. For a relatively unknown fintech company it can be difficult to convince banks to pair up and customers to trust them with their money, so they must come up with truly innovative solutions and scalable offerings. Another tough challenge is the regulatory environment. This means that fintechs have to make sure that all regulations are complied with and they must reduce the risk of fraud which can eventually lead to an increase in trust and recognition. Finally, probably the most important issue is that all the private consumer data has to be secured and stored properly.
So how could a bank-fintech collaboration be a win-win situation and be beneficial for both parties and end users at the same time? How can fintechs create value to banks and vice versa? Let’s find out!
First of all, one of the most important advantages of a cooperation is that banks can offer more functionalities and features to their customers by working with a fintech company aside. Banks can retain customers by using the technological know-how and user experience knowledge of fintechs. In many cases banks will also be able to reduce their costs by improving their digital services with the help of fintech startups rather than trying to find solutions on their own. From the fintech perspective, cooperation can lead to the increase of brand reputation as they can profit from the status of the banks (but this can be true from the banks’ perspective as well). Furthermore, both banks and fintechs can broaden their customer base. By collaborating with each other they can increase their market share and reach previously untouched demographic segments. For banks it is the younger customers, while for fintechs it is the older ones. And last but not least, the bank-fintech cooperation can foster the ability to scale up quickly. If the bank and the startup can work together efficiently and effectively, they can rapidly generate more profit and be more successful which might lead to a longer term partnership.
There exist several models and approaches to describe a bank-fintech collaboration, but in this post we decided to elaborate on the most common ones. Based on both financial and brand commitment, we can distinguish 4 different types of partnerships which are called the Channel, Supplier, Satellite and Merger. In the case of the Channel model, it is the bank who provides help for the fintech company in order to sell the products to the bank’s customers. In the Supplier model fintechs tend to act like one of the bank’s suppliers and integrate their products/services to the bank’s offering. The Satellite model is the development of the Supplier model. In this case the bank acquires the fintech company although it leaves it to operate independently. The Merger model is the traditional acquisition in which the acquired company fully blends into the financial institution. The following matrix places the different models based on their financial/brand commitment and illustrates it with examples:
The bank-fintech collaboration is mainly B2B (business-to-business), where B2B fintech startups often aim to help the bank because the consumer would not pay for the bank’s value-added services. In other cases the bank has much better marketing channels or simply consumers have more confidence in the services mediated by the bank.
As a design-driven fintech company, we can tell that sometimes it could be really challenging to work for huge financial institutions. In the meantime it is also advantageous because they can provide a tremendous amount of learning opportunities. From a designer perspective we had several interesting tasks and useful experiences when collaborating with a bank.
The broad variety of interesting tasks really challenged us and sometimes we felt the pressure, but overall it greatly contributed to our development as a professional UX/UI design team.
So based on our experiences we can say that bank-fintech partnerships can truly work and be beneficial if both parties are willing to learn from each other and handle customer expectations as a priority. However, we cannot foresee the future and we can’t tell what will happen in 5 or 10 years. Perhaps fintechs will manage to replace traditional banks due to the exponential growth in technology and digitalisation? Or banks will learn from their mistakes and will be able to transform on their own, without the technological know-how of fintechs? No one knows, only time can tell us.
We hope that you found this blog post useful! Do not hesitate to follow us, so you won’t miss interesting stories in the future either. The professional content of this blog post was provided by Dániel Ézsiás, Senior UX/UI designer at ff.next. Bence Siklós, Business Analyst and Melinda Havas, Head of Business Development & Marketing formed the material into this English article.