Opposites attract – fintechs and incumbents

The banking industry is experiencing tremendous change as customers opt for superior digital service delivery and better value from traditional products and services. This shift has resulted in a notable decrease in “bricks and mortar” service delivery. In 2017, European Union banks closed 9,100 branches and cut around 50,000 staff, according to data published by The European Banking Federation. In the United States, over 10,000 banks have closed branches since the financial crisis in 2008, and in 2017 alone, S&P Global Market Intelligence reported that 869 brick-and-mortar entities shut their doors.

In parallel, there has been a rise in technology-led innovation and digital new entrants in the banking market. Accenture analysis found that global investment in the financial technology (fintech) industry reached an all-time high in 2017, growing 18 percent to $27.4 billion, and the value of U.S. deals jumped 31 percent to $11.3 billion. This level of investment has resulted in the creation of a new distinct fintech sector which is durable and growing rapidly.

Is there scope for Incumbents to collaborate with Fintechs?

Before the financial crisis, banks were more progressive when it came to adopting new technologies. After the housing bubble burst, banks were consumed with complying with new rules and regulations. Innovation became a very distant priority and came to a standstill for many banks. At the same time, technology companies like Apple were developing revolutionary products such as the first smartphone, which debuted in 2007, and innovative business models such as Uber soon followed. This put pressure on traditional banks because many customers started to expect every transaction to be as easy as it is on many mobile apps such as Amazon.  

In recent years, banks realized the value of partnering with fintech firms to leverage innovation and in particular deliver an enhanced customer experience. In fact, an IDC study commissioned by SAP found that 60 percent of global banks are open to partnering with fintech startups. The collaboration between fintech and finserv companies are opening the door to new processes powered by artificial intelligence (AI), natural language processing, blockchain and IoT, and a range of benefits can be achieved. As an example, two years ago ATB Financial, a regional Canadian bank, worked with fintech startup Ripple and SAP, and ReiseBank AG in Germany to send the first real international blockchain payment from Canada to Germany. In 20 seconds, a transaction that would usually take six business days to process was completed.

How can banks and fintechs work together?

As with any relationship, fintech and incumbent banks must consider their respective strengths and weaknesses as they form partnerships. While banks have a large customer base and expansive repositories of customer data, fintechs are highly agile and adept at using new technologies such as artificial intelligence and blockchain technology. Fintechs can enhance banks’ customer experience capabilities and help automate mundane tasks. For example, by integrating data processing between control departments such as finance and risk & compliance, banks can spend less time on administrative tasks and more time on higher value projects.

In the case of fintechs and incumbent banks, the theory that “opposites attract” is valid. By embracing the strengths of a third party, a successful partnership can translate into higher customer loyalty and revenue as well as greater efficiency for an incumbent bank.

High potential opportunities for collaboration

One area that has high potential is the field of artificial intelligence, which is being used in a myriad of ways. In the case of behavioral analytics, fintechs such as Quantiply are leveraging AI to derive new insights and patterns to prevent money laundering. Quantiply is a member of the SAP Startup Focus program and has developed a solution which can assist in reducing the risk of money laundering through banks. It relies on cognitive agents that are continuously learning from human feedback to identify, respond and report money laundering and other “suspicious activities/events” to both banks and regulators.

Another area with high potential is the field of predictive analytics. Banks are increasingly leveraging these fintech solutions to enhance the experience for their retail and commercial customers. Two common examples are:

• Predicting future needs using customer data: Banks are leveraging fintech solutions to provide customer profiling capabilities that can anticipate customer needs and propose new products/services proactively to customers.
• Cross-selling opportunities for financial institutions: Technology that tracks customer buying patterns and investment behaviors allows banks to identify new cross-sell opportunities.

The road ahead

While banks and fintech partnerships start from very different positions, the future is bright for collaboration. The development of the fintech sector has been transformative for the financial services industry. Consumers and corporations alike have benefited from the innovation and creativity that fintechs have delivered. To stay competitive, banks can collaborate with fintechs to embed their technology solutions and skills, and accelerate their digital transformation. There is a growing body of evidence that incumbent banks that embrace these partnerships successfully will deliver superior results for customers and stakeholders alike.