Can fintech and banking play nicely together? Although traditional banks might have once eyed fintech companies with concern or suspicion, the stance of traditional financial service providers seems to be evolving. Traditional banks and financial service companies no longer necessarily look at fintechs as intruders in the field but instead often consider them valuable partners when these traditional companies want to reach new goals or increase engagement with their clients.

Bank and fintech collaboration also benefits the tech companies. They can expand into new markets while benefiting from the regulatory status of traditional banks. Continued collaboration and partnerships between fintech companies and banks are essential for the future of the financial services industry and the technology sector.

Why Fintech Collaboration Is Essential for the Future of Banking

What does the average consumer turn to when they need financial advice or assistance? The answer is uncertain but is likely not their bank. A survey conducted in April 2020 found that just 14% of consumers turned to their bank for financial advice following a life event that significantly affected their finances.

One of the reasons why consumers are often hesitant to seek out assistance and advice from traditional financial services companies is that they have little trust in those institutions. As the 2008 recession unfolded, 41% of people surveyed stated that they felt afraid, and 53% stated that the events leading up to the recession made them angry. The percentage of people who said that they had “high confidence” in banks fell from 53% in 2004 to 22% in 2009. Nearly 10 years later, the number of people who said they had high confidence in banks had climbed to 32%, which is still less than one-third of consumers.

In contrast, the amount of trust people have for technology companies is generally much higher than for financial institutions. In 2019, Pew Research reported 50% of people surveyed stated that they believed tech companies had a positive impact on the country. Another survey, the Edelman Trust Barometer, found that three-quarters of people trusted the technology sector. When banks connect with fintech companies, they can benefit from the higher levels of trust that consumers have in those businesses.

The evolution of the way people manage banking and financial services also highlights one of the reasons why fintechs and banks should work together. Just a few of the technological changes that have affected people’s banking behaviors include:

• Increased use of mobile devices: As of June 2019, 81% of adults in the U.S. own a smartphone, and more than half own a tablet. The percentage of smartphone owners in the U.S. jumped by 46% since 2011. Considerably more people now own mobile devices, and they are using them more and more. Seventeen percent of U.S. adults exclusively use their smartphones for internet access. Banks that want to connect with their customers should be considering ways to make the products and services they offer mobile-friendly.
• The development of the cloud: Thanks to the cloud, information can be easily accessed from any device that connects to the internet. That means that individuals can access their banking details from pretty much anywhere, and the financial information also updates itself in real-time. Previously, accounts would need to settle overnight before they contained the most up-to-date information. The cloud has allowed for speedier transactions as well as easier access.
• Increased availability of online services: While many people still visit a physical bank branch when they need to use their financial institution’s services, many have also embraced online banking, using it to transfer money between accounts, deposit checks, and track their transactions. For some, online banking is considerably more convenient, as it can take place at any time. In some cases, banks have offered consumers special perks to get them to use online services primarily, such as waiving overdraft fees or account fees.
• Heightened awareness of security: Data security is important during any type of transaction that takes place online. It is perhaps even more important in the banking world, as people’s life savings are often at stake. In response to data breaches, financial institutions have placed an emphasis on improving security and protecting private data. Since a bank might not have the resources or knowledge to focus on data protection on its own, working with fintech companies, which do have an understanding of vulnerabilities and ways to protect against them, is proving to be essential.

When banks and fintechs partner up, they can harness recent changes in behavior and use of technology and capitalize on the higher levels of trust people have in tech to provide services that effectively engage with consumers.

Benefits of Fintech Collaborations With Banks

Ninety-four percent of financial services companies said they were confident that fintech would help to grow their company’s revenue over the next two years. Ninety-five percent of technology companies said the same. The benefits of fintech for banks go beyond increasing revenue though. Some additional advantages of fintech and bank collaboration include:

• Building up brand reputation: If one of the partnering companies has a good reputation, that reputation can trickle down to the other company when the two work together. One example of fintech in banking is if a highly regarded fintech company launches an app with a bank, the bank can profit from the stature and status of the fintech company. Another way that the partnership can improve reputation is by demonstrating to a consumer base that the two companies have their customers’ best interests in mind.
• Offering more functions and features to consumers: A partnership between a fintech company and a financial services company allows the bank to offer its customers useful features and functions that it wasn’t previously able to provide, such as money management tools or mobile check deposits.
• Increased ease-of-use: Online banking features and apps should be user-friendly and easy for consumers to figure out and make the most of. When a bank works closely with a fintech, it can benefit from the company’s technological know-how and user experience knowledge to provide consumers with a program that is intuitive and easy-to-use. Thirteen percent of financial services companies ranked ease-of-use as the most important concern to address when trying to retain customers.
• Broadened consumer base: A bank and fintech partnership can be a bit of a “you scratch our back; we’ll scratch yours” arrangement. Through the partnership, each company can tap into the existing consumer base of the other, allowing them to broaden their market share and reach previously uncontacted customers. For example, a fintech might find that it can reach older customers as a result of its connection with a bank, while the bank finds that the partnership brings a younger demographic its way.
• Reduced costs: It can often be much less expensive for a bank to work with a fintech on improving the digital services it offers customers than for it to try to find ways to improve those services on its own.
• Ability to scale quickly: The partnership between fintechs and banks can be quickly scaled up or down, depending on consumer response and overall needs. If the initial partnership is a success, the two companies can brainstorm ways to deepen the relationship or to add more services or features. If it is not a success, pulling the plug or changing course is also relatively easy to do.

Types of Fintech Partnerships

All good partnerships require a bit of give-and-take. In the case of fintech and bank partnerships, each company usually has something the other needs. Banking fintech companies often have the ideas for a great product or service to offer, while traditional banks offer regulatory compliance and familiarity with financial rules and regulations.

Several different categories of partnership exist, depending on the product or service on offer.

• Banking: Several traditional banks have joined up with neobanks, also known as challenger banks, to provide digital savings and checking accounts to consumers or businesses. Often the neobanks have features that traditional banks do not offer, such as being online-only or rounding up transactions and automatically saving the difference.
• Small business loans: Another partnership category allows fintech companies to benefit from the lending ability of a traditional bank. Some companies focus specifically on developing loan programs for small businesses, a sector that often finds it difficult to get financing from more traditional lenders.
• Personal or consumer loans: Another option is for a fintech to work with a traditional bank to offer loans to consumers. The loans can be in the form of installment loans or credit cards. Often, the lending programs are targeted to consumers who might be otherwise shut out of or unable to get a loan from a traditional lender, such as people with low credit or those who only want to borrow a small amount.
• Debit cards: Some partnerships involve the issuance of debit cards or prepaid cards. Often, the card programs reach people who would otherwise be unbanked or who might be more wary of opening an account with a traditional financial institution.

Although a traditional bank is likely to offer a variety of products, such as loans and savings accounts as well as services for individuals and businesses, generally speaking, the typical bank and fintech partnership focuses on one product. The goal is to accentuate the services of the bank, rather than fully replace them.

When a bank is looking for fintech companies to partner with, it often makes the most sense to work with the businesses that already have an established customer base. One example is Uber, the ride-share company that also announced plans to offer a digital wallet and debit cards.

The partnerships between fintechs and banks can also take several different forms, depending on the needs of each partner. One common option is for a fintech to lease a bank its program, under a software-as-a-service (SaaS) model. Using SaaS, a bank can offer its own white-label product, such as a financial management app or a digital wallet.

Another option is to use the referral model. For example, a fintech company might work with a client through all the stages of the lending process, then transfer ownership of the loan over to a traditional bank. Alternatively, a bank might direct a consumer to a fintech if it believes the services offered by the fintech company are a better fit.

Challenges Facing Fintechs

Although there are notable advantages of a bank and fintech partnership, there are also some potential challenges to address. One of the most notable challenges concerns regulatory requirements. Before entering into a partnership together, both parties should be clear on the compliance rules. For example, a bank might consider checking with a fintech to learn more about what it does to ensure all regulations are followed and to reduce the risk of fraud.

Another challenge that faces fintech and bank partnerships is the risk of losing money. The challenge is particularly notable for partnerships that center around making loans. A bank that agrees to service loans made by a fintech might want to have a plan in place in case a considerable number of borrowers end up defaulting.

Security is another challenge fintech and banks face. Data breaches have become a part of life, with 1,196 breaches being reported in the first quarter of 2020. Companies need to find a way to keep the private information of consumers and businesses private, as well as a way to let those customers know that their personal information is secure.

Reputation and recognition are two additional concerns that can face banks and fintech companies. A traditional bank that wants to improve its image in the eyes of consumers can benefit from a partnership with a well-known fintech or with a technology company that is beginning to dip its toes into financial services. But it can be challenging for a new or relatively unknown fintech company to convince an established bank to pair up.

One solution to that issue might be for the fintech company to offer the bank access to its products or services on a white-label basis. The bank can brand the software or product created by the fintech, getting the technology out into the world and potentially improving its reputation and enlarging its customer base as it does so.