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The Partnership Series – Volume One: Financial Institutions and Technology Firms

Posted by Patrick True

Fri, Jan 10, 2020 @ 11:29 AM

Financial industry partnerships

The financial services industry seems to be transitioning into a new phase of technological advancement. The last 10 years have seen the beginning of a technological renaissance in many areas of the industry, affecting the way that both consumers and businesses interact with financial institutions. From payment services to lending and risk management, financial institutions continue to focus their resources on creating the best user experiences for clients and the most efficient workflows for employees. While the first 10 years of this process was shaped by the birth of new financial technology providers, the next 10 will more likely be driven by collaboration and partnerships between these companies and financial institutions.

In a recent blog published in The Financial Brand, Shawn Ward, co-founder and former CEO of Geezeo, and now a Managing Director at Jack Henry who acquired Geezeo in 2019, identified five reasons that collaborations between fintech and banking organizations could be a winning strategy for the future. He wrote:

  1. Fintech improves the health of traditional financial institutions by enhancing performance and improving profitability. When banks and credit unions see fintech firms as partners in this journey, rather than firms selling products, the opportunities begin to expand.
  2. Fintech solutions provide a way for legacy financial institutions to improve customer retention and preference. Data enrichment is an extremely powerful tool that quality fintech firms bring to the game.
  3. Fintech firms provide an opportunity to enhance loan portfolio diversification. When you can become more granular with each customer, you are more likely to find (and offer) consumers the exact products they need, when they need them.
  4. Fintech partnerships can help solve industry-specific points of pain, like securing credit card processing, transferring money, and processing loans quickly. With a strong fintech partnership, traditional financial organizations benefit from the leverage of a state of the art, secure network that can manage time-consuming and lengthy tasks quickly and effortlessly.
  5. Fintech data can provide financial institutions a keener insight into what their customers are doing with their money. This again speaks to the power of data enrichment fintech partnerships can provide. Further, the power of the cloud that quality fintech firms have tapped is another tool in delivering product offers and services specifically tailored to individual customers in real time.

Three specific market conditions have been at the center of the fintech movement, allowing for new technological systems to flourish and setting the stage for the next act. FinTechTris defined these three best in a June 2019 blog, How FinTech Partnerships with Banks Shape the Future of Finance.

  • Changes in consumer behavior: Customers became more willing to access, view, and perform financial transactions online because it was quick, convenient, and saved them on unnecessary costs (such as overdraft and monthly service fees).
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  • Advances in cloud-based technology: Customer-initiated transactions were able to be executed in real-time for processing and clearing, which helped enhance digital capabilities available to users online.
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  • Power and availability of mobile devices: The evolution of mobile devices, especially app-based smartphones, conveniently brought banking from a desktop to a customer’s pocket.

What do financial institution executives see as the most fertile ground for these collaborations and partnerships? To answer that question, you simply need to look at the community-centered orientation of the institutions. Their mission is to create the best user experience for both their retail and commercial clients. They can do that in a variety of ways. First, by creating great user interfaces to their services. Second, by making sure that these experiences are affordable, thus controlling their own internal operating expenses. The same Financial Brand blog referenced earlier outlined the following benefits of collaboration:

FB Benefits Banks see in collaborating with fintechs

Source: https://thefinancialbrand.com/71289/fintech-banking-partnership-cx-experience-benefit-trends/

To gauge the progress of the market to date, let’s look at a lending example from Harvard Business Review. This study outlined strategies for financial institutions that wanted to compete against online lenders. Since 2010, the market has been moving from the bottom left to the top right of the graphic below. Overall, we are now entering partnership phase indicated by the orange dots. From 2014 – 2017, the emphasis was on establishing referral strategies. Since then, larger institutions have set up innovation incubators and made direct equity investments in smaller emerging fintech firms. Now, the industry is moving toward a higher level of integration, working directly with fintech services to offer online loan origination and white label portfolio management services. Lending is just one example. Similar trends are occurring in other banking services.

HBR image

Source: https://hbr.org/2017/04/how-banks-can-compete-against-an-army-of-fintech-startups

Regulation and vendor management are also guiding technology firms to look at partnerships with financial institutions and core providers. Small technology firms are not typically equipped to navigate the landscape of the regulatory environment. As a result, it makes more sense for them to partner with larger fintech firms or directly with banks. As our partnership series continues, we will address other forms of partnership including fintech companies with other fintech companies, fintech with big data, and financial institutions with alternative lenders. In the meantime, download 7 Characteristics of Successful Technology Partnerships, a new white paper.

Throughout the first quarter of 2020, our content will focus on this theme of partnership and collaboration. Until next time, have a great January!

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Topics: Commercial Lending, Partnership, User Centricity

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