FinTech and Banks: Cooperation, Competition, or Co-Opetition?

Banks are facing stiff competition from fintech disruptors over the past couple of years. Thanks to access to increased Angel investors and VC funding, low-cost IT infrastructure and the use of innovative big data analytics, fintech firms are increasingly encroaching upon traditional banking business.

According to Deloitte, banks face competition from fintech upstarts in real-time payments, cross-border transactions, monthly statements, automated advice, and much more. Their 2020 Fintech Disruption report predicts that global fintech revenue will grow by a CAGR of 11.7% till 2024.

Banks have reacted to the threat by adopting digital transformation agendas and seeking greater collaboration with fintechs. After all, collaboration between banks and fintech allows for better distribution of costs, reduces barriers to entry for early adopting customers, and reduces risk of failure due to lack of adoption.

In this article, we take a look at the state of competition and cooperation between banks and fintechs, and explain why collaboration is the best way forward.

Cost-Effective Tech Upgrades

Banks have faced a technology challenge and they know it. For years, banks confined their tech operations to the back office and neglected streamlining their infrastructure. Once the digital revolution hit, they sorely lacked the foundation from which they could transform their businesses. Over the years, thanks to patching new solutions on top of legacy systems, the average bank’s infrastructure is a confused mess.

Fintech companies, on the other hand, are built with technology in mind from the ground-up. Financial applications are merely a specialization of sophisticated technology in these firms. For instance, complex credit rating algorithms can be repurposed to derive conclusions about anything from the stock market to the state of a company’s finances.

Banks initially responded to the fintech challenge by trying to build their own systems, but this was a losing proposition. Collaboration allows banks to access cutting-edge technology and essentially reset their infrastructure. They get to access sophisticated technical expertise instantly and can adopt best practices that help them build robust businesses.

From the fintech firms’ perspective, regulation is an ever-present barrier. For instance, in MENA it is a challenge to secure a digital banking and lending licenses for fintech firms. As a result, it’s tough for a fintech firm to expand quickly into new lines of business. Collaborating with banks helps them scale quickly and increase their user base.

As the user base increases, algorithms have more data to play with and the quality of their recommendations increases. In turn, banks can use these recommendations to direct customers to their vast suite of products. Thus, everyone benefits from this scenario.

Better Customer Orientation

Customization is the order of the day as far as consumers are concerned. Technology has improved to the point where consumer devices know what we want before we realize it. For instance, social media algorithms give us the content we would like to consume without us consciously choosing our preferences. This trend is now finding its way in retail, manufacturing, and even in banking.

Fintech companies understand algorithms and use them to eliminate traditional customer pain points. For instance, account opening at a traditional bank is a tedious process. Banks can leverage fintech expertise to remove this roadblock and increase their customer base. A good example of this approach is occurring in the UAE with RAKBANK and Yap.

Yap’s mobile app allows users to create an account in 30 seconds, receive an IBAN, and start receiving deposits and payments immediately. RAKBANK acts as the regulatory shield and backoffice banking provider in this scenario and has access to consumer activity. Thanks to Yap’s efforts, RAKBANK can offer customers traditional banking products that are tailored to their needs.

Consumers benefit from this collaboration thanks to Yap offering them deep analytics insight into their spending habits. By prioritizing good spending habits, Yap positions themselves as a financial educator, even providing children’s accounts and allowing parents to monitor spending.

Co-opetition results in a highly customised ecosystem that is geared towards the enhanced customer experience.

Handling New Competition

Tech firms like Google, Apple, and Amazon have entered the payments space. To survive, banks need the technical expertise fintech brings. Some banks have already begun reacting to this unique threat. In Pakistan, Finja is partnering with banks to offer mobile wallets, merchant services, and is focused on creating an ecosystem that offers lending products and integrated financial services. By using AI-driven algorithms to analyze consumer spending, Finja allows banks to suggest customized financial products within a single app.

Fawry in Egypt is partnering with banks like Emirates NBD, EIB, and Mashreq to offer similar solutions to consumers. In both cases, fintechs are consumer-facing apps that integrate into any shopping or browsing solution, with the bank adopting the back-end services role.Consumers interact with the app and use it to execute all financial transactions, no matter how complicated. As a result, the hold of traditional tech companies weakens. For instance, a consumer who purchases a product on Amazon will automatically use their Finja or Fawry mobile wallet to pay due to familiarity. They’re less likely to sign up for Amazon Pay and transfer money to a new app that has limited use.

Flexibility And Easy Scaling

Fintech companies can offer banks solutions on a per-customer basis, as well as build scalable architecture. Banks would only need to turn on or off the fintech services that their users need due to the flexibility that their back-end infrastructure would have. The cloud is at the center of such flexibility, and it is something that many banks have yet to adopt.

Cloud service providers remove the hassle of maintaining costly IT infrastructure and give fintechs the space to focus on their business. It’s a lesson that banks can learn. Not only will this reduce maintenance overheads, it will also eliminate potential lapses that occur from executing unfamiliar processes. For instance, banks would experience minimal downtime by relying on a cloud provider to upgrade their infrastructure.

Given the reduced overhead, banks can then solve issues in common banking functions. For instance, remittances are a constant problem for people working abroad. A routine wire transfer is expensive and takes three to four business days. Companies like KSA’s STCPay are disrupting this space and are offering consumers seamless experiences.

Collaborating with innovative fintechs can only benefit banks and provide top notch solutions to their customers.

The Way Forward

The digital revolution is only beginning and banks need fintech expertise to cope with the changes ahead. Fintech companies need banks to overcome regulatory hurdles and gain consumer trust. Collaboration is a win-win for both parties and we’re excited to see what the future holds.

HypeFin is a boutique fintech consulting community based in London and Dubai, helping fintechs from sail to scale in multiple geographies. Get in touch with us to discover how our experts could support your innovative services to scale across multiple markets.