The Benefits and Challenges of a Fintech and Traditional Bank Alliance

Fintech and traditional bank alliances are nothing new.

“Financial services has always been an ecosystem that relies on partnerships,” says Ellen Moeller, Head of Partnerships EMEA at Stripe.  Fintechs rely on partnering licenses or access to a bank’s network to function and, as a report from PWC (PDF) shows, 94% of financial services companies are confident that a partnership with fintechs would help them generate more revenue.

While alliances between fintechs and traditional banks arelargely symbiotic, they also pose some challenges. In this article, we explore the pros and cons of these relationships. 

Fintech and bank alliances are not just about profits 

Collaborations between fintechs and financial institutions do more than just boost the bottom line. They deliver new solutions, meet changing needs and safeguard customers from potential financial risks.

• Appeal to the traditional approach to money: When it comes to their finances, even younger generations tend to be conservative. While they may have no problem ordering groceries or an Uber on their smartphone, they’re less likely to swap their traditional bank account for an app.

As Georgy Sokolov, co-founder of crypto digital payments platform Wirex, says, “You cannot expect people to switch away from the banks they have trusted for generations to something completely new.” Through collaborations, fintechs gain customer trust and loyalty, while banks gain agility and innovation. 

• Digital agility for “tools and rails”:With the continued decentralisation of financial systems, banks cannot prioritise digital agility quickly enough. Alliances with fintechs help global financial institutions breach the digital future; legacy financial institutions offer fintechs the “tools and rails” to create and position new products.

Moeller, of Stripe, says, “Ultimately, it is this network of partnerships with banks, card networks and payment methods around the world that makes Stripe an access point for new fintechs wanting to build products on top of existing financial services infrastructure.”

• Maintaining the integrity of the financial ecosystem: Data privacy and security concerns have led to tough regulations in digital finance, making it difficult for fintechs to navigate these changing paths alone. Legacy banks have developed stringent anti-money laundering policies and security expertise. Partnering with banks allows fintechs to remain compliant while they continue to push for innovation.

Marieke Flament, CEO of Mettle, a digital-only business account platform backed by NatWest, says that these partnerships offer “an innovation test bed, the best of both worlds. It can be hard for a large traditional banking institution to roll out new cool features every month. But it is also very hard and expensive for the bold and agile fintechs to navigate the complex and ever changing regulatory landscape. Everyone should be doing what they are best at.”

• Functions, features and ease of use: Thanks to the tech innovations that fintechs bring to these collaborations, banks can offer customers improved functionality and expanded features, including mobile banking, customised services and better insight into their money. Fintechs place significant focus on UX and UI, resulting in increased ease of use, which financial institutions admit is a top concern when retaining customers (PDF).

• Broadened customer base:A fintech and traditional bank collaboration means both can tap into each other's customer bases, allowing fintechs to reach older demographics and banks younger. Obviously, this can result in increased market share for both.

• Scale up or down and reduce costs: Collaborating with banks gives fintechs opportunities to scale up their products. Banks can directly use those products without having to build them from scratch, which can be more expensive. But if a partnership between a bank and a fintech company doesn't work out, they are free to terminate it without fuss.

Challenges of fintech and traditional bank alliances 

When it comes to an alliance between a fintech and a legacy financial institution, the benefits outweigh the drawbacks. However, it does pose certain risks that should be addressed, including:

• Not all demographics are comfortable with technology. The gap between the tech-savvy and the technophobic increases even more when you go global. So, if a consumer is expected to have technology awareness just by dint of having a traditional banking account, institutions can end up losing customers.

• Integrating fintech would give rise to widespread change, not only in the bank's work processes but also in its culture. It will mean adopting an atmosphere of change and innovation, which can be more difficult to bring about successfully.

• Banks partnering with fintechs give rise to their own set of risks, such as compliance, operational, cyber and strategic. The pace at which legacy banks and fintechs work vary vastly and without due diligence, a fintech partnership could lead to many unforeseen risks. 

Keeping this in mind, John Garvey, Global Financial Services Leader, PwC US, advises, “The really big changes have to be top-down. They have to be something that leadership, the board and the executives are closely involved in and have decided the organisation needs to pursue.”

Learn more about our Oxford Fintech Programme enables business leaders to implement changes while maximising benefits.