Financial Institutions and Fintechs – Friend or Foe?
Large financial institutions (FIs) are historically not known for innovation in financial products or services, and before recent times, the financial industry as a whole, was known to be traditional and not very innovative. In fact, one could argue that the last great financial innovation was the credit card. However, necessity breeds innovation, as the saying goes. And as the financial crisis that began in 2008 hit, alternative financial instruments, methods of payments and a multitude of fintechs sprung up to address various financial needs and gaps in the network of payment services. Still, the inconveniences felt from users in the traditional banking system wasn’t quite enough to propel these alternative payment methods into popularity. Fast forward 12 years, and a global pandemic of unseen proportions accelerated the conditions for fintech growth and the drastic need for alternative payment options. Whilst banks were still considered trustworthy, the continued frustration in the banking operating systems, as compared to the upcoming tried and tested alternative payment options, propelled innovation in the financial sector.
As this happened, the banking industry was viewed as archaic and inflexible. Fintechs solved financial problems without the red tape of a traditional FI. This could easily have been seen as a “we versus them” issue. However, each sector had something that the other needed, and a symbiotic relationship was deemed necessary to propel growth. Financial institutions still held the trust of the customer base and offered the stability of regulated financial services, while fintechs demonstrated the agility and niche areas of expertise to create alternative financial services that offered more convenience to suit the evolving lifestyles of customers. Both need each other to stay relevant, grow and be successful.
Naturally, partnerships between FIs and fintech companies have made the most sense. Whilst some fintechs have sought to compete directly with the payment services of the banking sector and basically replace the bank, other fintechs see their role as more of an enabler for banks to modernize the convenience and efficiency of the banks to better serve their customers. Collaboration, rather than competition, has emerged as the best way forward. It is important for FIs to partner with the right fintech to be able to reach their goals. Specific market needs must be assessed and the right partner to provide the right solutions should be sought out. Fintechs tend to focus on specialized areas, and these areas are where their expertise will come into play. Rather than the bank having to invest in research and knowledge seeking, it makes sense for a bank to use a fintech company that has already solved a particular problem. If a fintech can provide solutions for more than one area of concern, FIs can take advantage of this by consolidating services to one company, rather than several smaller ones.
Finding the right partner is crucial. Large FIs with generational customers will want to attract new, young customers by providing the latest financial technology, which very often translates to convenience, such as self-service kiosks, contactless payments, mobile payments, mobile accounts and wallets with a digital stored value. FIs that may be smaller and somewhat less sophisticated may want to up-level their services to include services which were previously seen as too high of an investment, such as online or mobile banking, or providing e-commerce services. This helps to level the playing field with larger companies. Some fintech companies may have the technical capacity to facilitate integration via APIs with other solutions in order to provide a well-rounded solution to the bank’s clients and even the general public. Being able to integrate and provide the right solution for the customer very often results from the right partnerships.
Even Central Banks have been moving towards the provision of more innovative payment services. In some cases this is achieved through the installation of a national switch that would integrate with clearing electronic payments for all its supervised banks. Some Central Banks are also pursuing the issuance and operations of a Central Bank Digital Coin (CBDC) to replace cash transfers. To achieve more common use of CBDCs the Central Bank and its supervised banks will also benefit from the right partnerships with local fintechs that can expand the application and use options of the CBDC.
All in all, the business of financial technology is to make managing money easier, for the FI, the fintech company, the Central Bank and, ultimately, for the customers in the communities they serve. Providing trust and ease of use is always at the forefront of innovation, and this could not be truer for the financial sector.
Global Processing Centre is a well-established Caribbean fintech, certified by Visa and MasterCard, which has been working with major FIs across the Caribbean and has significant experience in the payments sector, providing the technology infrastructure to enhance FIs, other fintechs and payment companies with next level services and solutions. If you can imagine it, we can enable you and help build it. Contact us to find out more.
