How are Banks Getting The Support from Fintechs
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FinTech players initially sprouted from the opportunity left open by inefficiencies in the banking system, especially around the 2008 crisis when many banks pushed brakes on their growth engines to consolidate and re-evaluate themselves and their risk processes. In the early days the popular belief, often echoed by FinTechs, was that banks will be replaced completely by FinTech players and banks will not be required for banking in the future.
However, over time various models have evolved and we are increasingly witnessing symbiotic relationships between Banks and FinTech players. While few Banks have been turning a blind eye to the FinTech revolution, most have been actively identifying opportunities to engage and leverage the rise of FinTech either through technology partnerships or equity investments and acquisitions or incubation programs or business partnerships – both transactional and strategic.
Helping Banks with Technology
At the very basic level several FinTech players have helped banks digitize their processes and smoothen out customer journeys. Although not new to the industry but, many FinTech players have been offering SaaS (Software-as-a-Service) offering to Banks. The key differentiator between the incumbent SaaS players and FinTechs offering SaaS solutions lies in the depth of understanding the practical pain-points faced by Banks in offering their services or pain-points faced by customers in their journey. The product road-map of most incumbent players reflects the needs voiced by Banks and therefore, is not necessarily geared towards using cutting edge technologies or innovation in thinking on how to solve those pain-points with a non-traditional approach.
Symbiotic Ideation Platforms
Many Banks globally and in India have also opened incubation centres where they encourage budding FinTech players to enrol and support them with Industry and Regulatory Expertise as well as sample data sets to build upon. While this provides a great platform for FinTechs to accelerate their hypothesis testing and prototyping, it has also become a hub for Banks to get access to cutting edge and innovating thinking of budding FinTech entrepreneurs. This also creates a wide opportunity for building early stage partnerships between banks and FinTechs often leading to equity investments or acquisitions. However, it would be in best interest of both Banks and FinTechs to not create water-tight lock-ins in these early stage partnerships as that might stifle innovation – they very element both are trying to encourage through these Incubation Platforms.
This format has been the most fruitful form of engagement between Banks and FinTechs. Banks, that have been more open in their thinking and more cognizant of the changes that are coming in, have felt less threatened by the FinTechs but have been able to look beyond their insecurities into the opportunity that collaboration with FinTechs provides. Similarly, FinTech that are not overly romantic about displacing the institution, but positively disrupting the experience and challenging the inefficiencies, have been more open to engaging with Banks in Business Partnerships. There are several examples of the same both globally and within India. Some Banks, especially challenger banks, were quick to partner with payment FinTechs and provide them bank-end infrastructure to build various products and access untapped markets. In doing so the banks built handsome income on the ‘float’ that got created for them. While many banks and NBFCs are partnering with FinTech marketplaces for distribution of their loan products, some Banks and NBFCs have strategically identified certain loan product where they intend to primarily grow through partnerships with FinTech companies as a channel. More often that not, these are products that Banks and NBFCs have not been very strong in, lack deep risk assessment capabilities, or require a strong and agile technology backend to service. For example, payday loans, purchase financing, unsecured business loans, dealer financing, etc. FinTechs therefore, help banks in expanding their product offering and creating more profitable avenues to deploy their capital and Banks help FinTechs in serving more customers without worrying about having to continuously raise equity and debt capital for lending.
While there are still fringe players, who are operating in isolation, both Banks and FinTechs have either realized the benefit of leveraging each other’s strength or are starting to realize the same and therefore it is quite likely that as the FinTech revolution plays out, both Banks and FinTechs will clearly identify their role based on the strengths and capabilities each brings on the table. While competing in certain areas, Banks and FinTechs are likely to collaborate on many dimensions. The Business Model of Banking is going through an evolution from one institution providing all services to a closely-knit community of players providing the set of services they are best positioned to provide – front ended by either Banks or Fintechs based on the product/ services being provided. Banks that are early to realize this tectonic shift which is taking place will be able to get more out of the evolving FinTechs.