Long reads

Are financial infrastructure partnerships the future of banking?

Sebastian Zawada

Sebastian Zawada

Content and Community Officer , Finextra

In January 2021, Finextra and Banking Circle hosted a webinar focusing on the hurdles that legacy systems present for digital transformation.

Experts from ING and Crown Agents Bank joined the discussion and explored the benefits financial infrastructure partnering holds for business relationships and customer experience, as well as how banks can disseminate what should be built in-house and where to outsource to partners.

Can financial partnerships be the future of banking? 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.

This has been seen in the German banking sector, as Søren Skov Mogensen, chief growth officer at Banking Circle, exemplified during the webinar.

“A certain German media outlet has recently published this amazing map of banks, selected banks in Germany against fintech partners, and how that has stacked up and really is becoming a rich landscape in most regions.”

Mogensen also identified that banks decide on partnerships by considering factors like improvements to back-end infrastructure.

“Almost half of the banks that we've been in dialogue with say that existing infrastructure and financial infrastructure is one of their three biggest internal challenges. They require a back-end infrastructure plan to be tailored and ready for the new circumstances that we're in due to Covid-19.”

Research conducted by EY in 2020 on fintech partnerships reveals the statements made by Mogensen are a growing trend for financial partnerships.

84% of banks are considering new fintech partnerships to improve customer experience and accelerate digital transformation. The research also added that to achieve the next evolution of payments for banks, it will be driven by payment partnership.

Steven Marshall, chief commercial officer at Crown Agents Bank, explained that the reasons for undertaking a fintech partnership was to build a global payment system.

“We aimed to build our global payment system, we tried to partner and integrate a series of banking and payment partnerships. ERC integrations, moving through into SFTP file drawer and ultimately, of course, looking to always meet with API.”

The Capgemini world payments report 2020 builds on the comments made by Marshall. The report finds that more partnerships between banks and fintech’s focus on back-office optimisation and infrastructure requirements needed to accommodate new and improved payment methods.

The report also states that banks are still experiencing challenges with managing legacy systems, technology infrastructure, risk management, as well as the prospect of adapting operating models.

However, where fintechs were initially seen as a threat - a disruptor to the market in a race to be the first to deliver real-time payments, the two entities are now collaborating on this venture more than ever before.

Olivier Guillaumond, global head of innovation labs and fintechs at ING, believed partnerships can be complicated, but the end goal can offer significant rewards to both partners.

The main aim is to have a perspective on what you would like to achieve from working in a financial partnership with a fintech. 

“So, partnerships, it’s a long journey. The purpose is beyond that it is to serve a customer or serve a colleague, it is to accelerate. There are many reasons why someone may want to partner but, in the end, it's about the purpose that you want to achieve, you know whether partnership is the right way to get there.”

Guillaumond also pointed out that a successful partnership starts with identifying if you are ready to alter your company’s DNA and its strategic direction.

“You need to change your DNA. It is great having that consistence direction, strategic direction and having the DNA that goes with it. Understanding that is complicated, understanding the skills and the mindset that you need to have in order to make these partnerships useful.”

The webinar panellists also identified and explored potential digital transformation challenges that can impact new and existing financial partnerships. The main challenge is the Covid-19 pandemic, but there are also other hurdles the panellists outlined.

Mogensen pointed out other potential issues that currently have the biggest impact on digital transformation and how to solve them.

“A major issue is not having a line of sight on how to actually run a digital transformation, what is it we want to transform? How do we want to do it? What is in scope? What is not? You know, how ambitious should be set from the outset?”

Mogensen added: “Secondly, making sure that the people resources are stacked up against the scope of the tasks, that there is organisational alignment not only in the in the engine room but also in the support functions and financial infrastructure to run digital transformation.”

There are also challenges of Covid-19 on digital transformation. Mogensen identified the inevitable surge of new digital initiatives and shift to infrastructure plans. 

“The pandemic has certainly accelerated digital change and evolution. Our survey found that two thirds of our 300 questioned banks said that the pandemic has caused them to change their infrastructure plans.”

Marshall acknowledged the pandemic as challenging for Crown Agents Bank which has resulted in some organisational changes, but he believes the plan to proceed with digitalisation was always there even before Covid-19, but it has rapidly accelerated the process during the pandemic.  

“The pandemic for us has been a significant challenge clearly, but what we've seen is a progressive move to digitalisation and that is driven by ultimately by our customers. We have been in constant progress towards more digital payment methodologies. Of course, with simple things like bank branches being closed, we've seen that migration to digitisation intensified.”

Guillaumond summarised the points by other panellists and added that the pandemic has rapidly accelerated digitalisation across the world.

“The pandemic has really rapidly accelerated the move towards digitalisation, mostly in the payment industry. It also put even more pressure to implement past digitalisation plans into reality.”

In a global survey conducted by McKinsey on how Covid-19 has transformed business forever, it was found that financial institutions have accelerated the digitisation of their customers and internal operations by three to four years.

The survey finds that banks have introduced temporary solutions to meet many of the new demands and implemented digitalisation faster than planned before the pandemic.

The analysis in the survey also showed that to stay competitive in this new economic environment, it requires new strategies and practices such as building new partnerships for banks, but these collaborations need to be right for the business. 

Marshall summarised the key aspects of finding the right partnership and what it takes to create a successful collaboration. 

“The key is to understand what do you actually want to deliver? We said, we want to build a global payment network and we want to create a certain revenue trajectory. This allowed us to find the right partner to build that with us.”

Guillaumond added:

“The partnership needs to work towards a similar objective, you need to establish a willingness to be open for change and open for partnerships. This will then cascade throughout the organisation. One thing that we have done is to develop a whole methodology, not so much looking at solutions, but really looking at the problem that we're trying to solve and the opportunities available in terms of partnerships to find a solution.”

Summarising the discussion, all webinar panellists agreed that there must be a clear purpose for a partnership and the foundation of a successful partnership is a shared vision.

In addition to this, the relationship needs to deliver value for the bank, the partner, and the customer. The collaboration also requires a plan around how to approach and treat customers, how to improve the depth and quality of support they offer, and how they intend to impact the market together.

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