Collaboration vs competition: where fintechs and banks really meet

From rivals to partners: where banks and fintechs converge in today’s market.

For more than a decade, the relationship between fintechs and banks has been framed as a battle: nimble startups disrupting legacy institutions against incumbents fending off challengers with scale and trust. However, the truth is not only more complex, it’s also more collaborative.

Competition remains, but the real story is in how fintechs and banks are working with each other, through strategic investments, embedded solutions, referral arrangements and more. Partnerships that are delivering new value to customers.

What is fintech, anyway?

Fintech. Is it an idea? A company or collection of companies? A movement? Software, a specific app or technology in general?

Well, unhelpfully, it’s probably been all the above at various times and depending on the context. A good definition of fintech comes from The Bank of England: ‘Technology-enabled financial innovation, which is changing the way financial institutions provide – and consumers and business use – financial services.”

The aim of fintech is generally to use technology to make financial services better. So, faster, cheaper and more efficient. But also more digital, personalized and intelligent.

Fintech is not a new idea. It’s been around in the B2B space since at least the 1970s. For example, Nasdaq, the first electronic stock market emerged in 1971, payment card network Visa in 1977, and financial services software provider Misys in 1979.

For the last 15-20 years, fintech companies have entered the B2C space. Using APIs, cloud and other digital technologies, they’re re-shaping how consumers engage with their money. That’s everything from offering better personal loans and point-of-sale credit to more streamlined ID checks and quicker payments.

Fintech F-U-D: fear, uncertainty, doubt

Initially, fintech was terrifying for banks. They feared that fintechs would disrupt business models and customer relationships. How we spend, save, invest and insure would change forever. And banks would be disintermediated.

This is almost a misclassification of what fintech is. Fintech is more a movement than a collection of companies. A statement of intent to deliver things in a certain way. Generally, developing products and services that are more user-friendly, more cost-effective to deliver and optimized for digital channels.

The fear, uncertainty and doubt among incumbents during the first wave of fintech has given way to a more collaborative approach. This is partly because fintechs became more of a threat to suppliers than banks.

Banks leveraged software-as-a-service (SaaS) models to embed fintech. This helped them expand their addressable markets, make switching harder and increase customer lifetime value.

Race to the middle

The more adversarial bank-fintech dynamic has given way to collaboration and co-petition. Both parties realized that to truly realize the opportunity of fintech, they needed to work together. That may be around data, brand, distribution or technical and regulatory expertise.

While banks have disadvantages relative to start-ups, they also have advantages. That’s the central premise behind the paper Fintech 2.0: re-booting financial services from 2015, which still holds true ten years on.

Being regulated is a burden for banks, but it creates consumer confidence. A long history brings with it legacy systems, but also builds trusted brands and provides historic data, scale, a banking licence and a head-start in compliance activities.

Fintechs may well have new brands, untainted by the 2008 financial crisis, new technology and new mentalities. Yet banks have brand recognition, money and customers. It’s become less winner-takes-all and more a race to the middle.

Different ways to collaborate

There are as many ways to collaborate as there are collaborations. Accelerators and incubators are one way for incumbent banks and fintech start-ups to get close to and learn from one another.

Mastercard set up one such program in 2014 and has supported more than 500 fintechs in 55+ countries. Plus brokered more than 15,000 global connections, enabling start-ups to raise an estimated $25 billion worth of capital post-program.

Another way to partner is through mergers and acquisition (M&A). For example, JPMorgan has acquired several fintechs. This includes the payment technology firm WePay in 2017, digital wealth manager Nutmeg in 2021, ESG investing platform OpenInvest in 2021, Renovite a payments technology firm in 2022 and investment analytics platform Aunmi in 2023.

Then there are joint ventures between banks and fintechs. This allows banks to embed ‘best of breed’ technical solutions, without the heavy investment in research and development. For example, HSBC has formed a joint venture with business commerce platform Tradeshift to jointly launch embedded finance solutions and financial services apps.

White label arrangements involve banks purchasing, customizing and offering fintech solutions under their own brand. Meanwhile under referral partnerships banks refer their customers to fintech partners for a commission.

From accelerators to acquisitions, joint ventures to referrals, such win-win partnerships enable both banks and fintechs to achieve results neither could have managed alone. Or as the African proverb suggests: if you want to go fast, go alone. If you want to go far, go together.

How to evaluate potential partners

Banks and fintechs must learn how to adapt and that means partnering smart and building collaborative ecosystems. Here are five considerations when evaluating potential bank-fintech partnerships.

1. Chemistry

Consider your own business, customer base and ambitions. How do you plan to develop your business over the next 2-5 years? Think about what your organization is like to work with. What are your strengths and weaknesses as a partner? Chemistry, cultural fit and strategic alignment are critical to a successful partnership.

2. Company background and experience

Ask for an overview of a potential partner’s company, history, size and areas of expertise, including experience of working on similar projects and references from previous clients.

3. Technical capabilities

Ask for a description of the potential partner’s technical infrastructure and capabilities relevant to the engagement. Areas to probes include architecture, integration, documentation, sandboxing and reliability. To what extent do these address your requirements and challenges?

4. Solution approach

How would you work with a potential partner to tackle your requirements? Ask them to describe the features and functionality they would include. Plus, an indicative timeline for implementation, including key milestones and deliverables.

5. Compliance and security

How does any solution you create together comply with relevant industry standards and regulations. Consider issues like data protection, privacy, cybersecurity, disaster recovery and business continuity.

In conclusion

The relationship between fintechs and banks is no longer defined by simple binaries of friend or foe. Rather, it’s a continuum where competition sparks innovation and collaboration delivers scale. The organizations that will thrive are those that recognize when to compete, when to partner and how to align their strengths to create new forms of value.