Long reads

Banks and fintech firms: The symbiotic relationship

Níamh Curran

Níamh Curran

Senior Reporter, Finextra

Customers expect a lot more from their banks today. They anticipate a full digital experience that engages with them on an individual, personalised basis. Fintech firms have excelled in customer experience and are far better at providing tailored products and services than the banks, despite the latter’s advantages in infrastructure and inherited brand recognition.

The Capgemini World Retail Banking Report 2022 found that 52% of respondents felt that their bank was not “fun” and many reported that their banks did not offer them the seamless experiences, personalisation, and innovation that they desired from their digital financial relationship.

In contrast to this, 85% revealed that they would recommend a fintech firm to a friend or family. Additionally, about 75% said that fast, low-cost services that are accessible and easy to use motivated them to consider switching to a fintech provider.

While banks have remained in their stronghold since they have many more years of experience to offer, their inherited structures often leave them in the perfect position to guide their younger fintech cousins in the right direction. Neither banks nor fintech firms exist in the financial world alone; they form an ecosystem in which they can learn and grow with each other, creating greater stability and customer satisfaction.

Finextra spoke to a variety of ecosystem players, including Capgemini, HSBC, Metro Bank, Zopa, and Payoneer to uncover what banks and fintech firms can learn from each other.

What can banks learn from fintechs?

Fintech firms are better in how they leverage data to supplement customer experience to enhance their product range and innovate in a timely and relevant manner, explains Gareth Wilson, vice president of UK banking and capital markets at Capgemini. “I always describe the banks as being data rich, but not very data centric. Whereas fintechs are able to leverage data.”

Thomas Halpin, global head of payments product management at HSBC global liquidity and cash management shares this sentiment: “At the heart of this are the needs of customers, and fintechs have shown how important it is to use data and modern technology to deliver a client-centric user experience. The pace at which fintechs continue to adapt and innovate in this space is a key learning for banks.”

James Allum, SVP at Payoneer, explains that until recently, banks have been able to rely upon a loyal customer base by developing personal relationships in local branches. Conversely, fintechs have always relied on data to understand their customer base and shape interactions with them. The democratisation of financial data through regulations such as Open Banking have benefitted consumers and business, and digital-first fintechs have been better placed to quickly implement technologies like AI and machine learning to harness the power of data.

As digital organisations, fintechs understand digital customers, notes Allum. Creating digital relationships has always been an innate part of their business and they aren’t battling with legacy systems to incorporate new technologies. “We are living in a new age of digital commerce and fintechs benefit from the fact their customer base come to the platform as a digital service, whilst traditional banks must maintain in person services as well as digital offerings to cater for their wider customer base.”

Gamification presents another unique way in which fintechs are trying to engage their customers in a novel way. Wilson argues that because people enjoy this approach, they’re motivated to engage and continue coming back to the experience. He continues that fintechs are better equipped to create this engagement from a customer experience point of view than banks are, “creating greater value, and greater emotion.”

Building this emotional connection with a customer is challenging, and while many banks have made headway, it is more challenging for them compared to their fintech counterparts, argues Clare Gambardella, chief customer officer at Zopa. Not only do banks have legacy systems to overcome, they also have entrenched ways of thinking about products that are outdated and don’t serve the end user. In this regard, they have much to learn from fintechs.

Many fintechs are able to differentiate themselves through their technology, because a satisfying technological experience can create loyalty from customers which keeps them returning. In recent years many banks have taken note of this and formed partnerships with fintechs to take advantage of the position of fintechs in this area.

Kat Robinson, customer experience director at Metro Bank explains that working with fintechs has benefits for the banks, as it enables them to accelerate strategy and provide and affordable access to cutting edge technologies. “The energy and enthusiasm these young companies have also challenges the bank and its colleagues to think differently and focus on innovation.”

Banks need to think about how improve their customer experience in a digital first way. While Zopa now has its banking licence, it has strong roots as a fintech and is able to take the “digital first” approach. Gambardella explains that achieving this digital first approach means more than merely putting an attractive UX on the front of the product or extending legacy processes, rather, “it means really thinking through the customer experience in a digital first way. That approach is why companies like Zopa can deliver at a much greater speed. For example, an account opening in three minutes, decisioning 95% of our loans in sixty seconds, supplying 99% of our customers with their loans in under two hours. That speed doesn’t come from just digitalising a manual process.”

What can fintechs learn from banks?

Despite the many advantages that banks can learn from fintechs, financial institutions continue to hold strengths and benefits that are harder for fintechs to achieve. Most notably, argue our interviewees, is the trust factor. 

The strength of reputation and trust held by incumbent financial institutions – particularly when it comes to handling customer data, is intrinsic to banks’ loyal customer base. The Covid-19 pandemic reinforced this, according to Wilson, where banks did “well in terms of their response and increasing customer confidence.”

 “I think we all trust the banks in terms of being able to execute transactions, being able to complete payments, being able to give us very accurate and up to date information. So, they've got that benefit from that trust.”

On top of this, banks are also highly attuned to security, risk management as well as redundancy and capacity planning – likely a result of the intense regulatory scrutiny the industry has long been accustomed to. These disciplines help keeps banks safe and secure and build confidence with clients, but they can often be a challenge for fintechs as they rapidly scale their businesses, Halpin explains.

Without a strong reputation for effective risk and security management, the emotional relationship between fintechs and their customers can be damaged. In addition to this, fintechs also run the risk of scaling effectively. While large financial institutions have been able to scale over time, building a resilient, loyal customer base, fintechs are pressured to scale their customer base rapidly, and this presents unique challenges.

Halpin argues that while fintechs rarely have challenges scaling their technology, they are often challenged by growing their clients and user base quickly enough. “Bank scale is acquired over many years, through the delivery of a range of financial services that address the changing needs of their clients wherever they might be in their own financial life-cycle, which builds long lasting relationships.” Halpin recommended that fintechs should adopt a similar strategy by expanding the breadth of their services or could consider bank partnerships that turn great ideas into great solutions with scale, resilience, and regulatory support to make a real difference to customers.”

Metro Bank’s Robinson furthers that the scale at which many banks have over fintechs can give them an insight into customers. Banks can share their experience around understanding its customers, how they behave, and what they want, “which can help fintechs develop their proposition and use cases.”

This ability to scale can impact the profitability of many fintechs. Indeed, while fintechs are becoming increasingly profitable, many struggle to get to that stage. Incumbents typically have greater capital resource to allocate toward scaling efforts, providing them with a stability which is encouraging for customer relationships. Although legacy technology causes problems, the wider reputational strength of banks puts them at a significant advantage.

To this point, Wilson questions: “I think that's the area where fintechs are somewhat lagging behind. How do they go beyond popularity to profitability, and therefore becoming more sustainable businesses.”

Coming from Zopa bank’s perspective,  with their overall focus of reaching profitability, Gambardella argues that fintechs should consider the fundamental factor of how and why the banking business model has succeeded for so long.

“Established banks are highly profitable. That has been a big reason  why they have been sustainable through very uncertain economic periods. The fintech industry has largely been focused around the idea of growth, particularly around prioritising customer growth numbers, above all else. That has been fuelled by the climate in the equity markets over the last few years, which is very much prioritised platform or customer growth, in some cases over and above business model and profitability. That's definitely changing. I think what we're seeing is more and more businesses  looking to create a business model that is sustainable.”

As fintech remains in its early stages as an industry, Allum suggests that there are a few ways in which fintech should learn from incumbents as they enter the space. “As companies enter their next phase they can look to banks to grasp how to operationalise on a larger scale. There are so many considerations that need to be balanced at a company with scale and for some fintechs this requires a complete shift in mindset. The scale of traditional financial institutions means that they are intrinsically woven into the fabric of the financial system. As fintech companies mature and become more closely regulated they will naturally need to emulate banks in some ways.”

Can banks and fintechs build a symbiotic relationship?

When asked about the relationship that fintechs and banks can nurture into the future, Allum states that it should be less about teaching and more about understanding the mutually beneficial roles that both fintechs and banks can play in the market. “There are of course, areas where banks and fintechs compete, but the notion that the two are at odds is unfounded.”

Allum adds that there is huge scope for collaboration between fintechs and banks. “From a product perspective, banks are perfectly placed the provide the infrastructure, like the plumbing for the financial system. Fintechs are able to innovate on top of and within that infrastructure to create solutions which benefit all players.”

Robinson adds that Metro Bank has learnt about focus, speed to market and genuine agility from fintech over the last 12 months. “This has really helped reignite our culture with the spirit of innovation; we have seen this significantly reflected through our annual colleague feedback. We launched our first innovation lab last year and ultimately chose to work with three new start-ups to improve our customer journey, operational efficiency, and data governance.”

Neither banks nor fintechs will disappear, both will co-exist and grow from each other’s experiences. Fintechs currently have an advantage when it comes to the emotional relationship they form with customers, but banks can learn from these methods. Banks have such a scale and legacy advantage which fintechs seek learn from, and indeed many banks will help fintechs with this through strong partnerships and innovation.

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