We explore how banks and fintechs are collaborating in mutually beneficial ways.
Fintech is a 21st century success story. Financial technology start-ups, or fintechs, have been quick to capitalize on technology to launch new products, which are optimized for digital channels, more user-friendly and cheaper to deliver.
Capital has flowed into the sector. More than $50 billion was invested globally in fintech across nearly 4,000 deals in 2023, according to Innovate Finance. Despite the economic headwinds, payment platforms attracted some of the largest capital raises last year, including Stripe with a $6.9 billion raise.
Relations between banks and fintechs have also changed over the last 25 years. Competition has given way to collaboration and co-opetition. But why? What does each side get out of the deal, and what do successful collaborations typically look like?
More bank-fintech partnerships: why?
Banks face a burning platform. On average, 75% of bank IT budget goes on maintaining legacy systems – and that’s an average. Some studies put it higher at 80%. Others lower at 60%. But even at the lower end of things, these are big numbers, leaving little over for innovation.
Greater availability of open-source software, cloud computing and APIs have lowered barriers to entry. Regulatory shifts towards customers owning their data as well as efforts to reduce red tape have had a similar effect. As such, banks face disintermediation threats from fintech and Big Tech.
Banks had to consider how they remained relevant. What did they see themselves being and doing? And how did their customers see them? The go-it-alone approach quickly seemed impractical and unsustainable and gave way to a more pragmatic approach to partnership.
Bank-fintech partnerships: a win-win proposition?
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 is still true today.
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. To truly realize the opportunity of fintech, both parties need to collaborate, each providing the other with what it lacks. That may be around data, brand, distribution or technical and regulatory expertise.
What does a successful collaboration look like?
Collaboration creates something that is greater than the sum of its parts. And which neither party would have been able to realise alone. That being said, there are almost as many different types of collaborations as there are collaborators.
A successful collaboration may involve a degree of specialization. For example, a local bank may specialize in offering financial services, such as bank accounts, savings and mortgage products. Cross-border payment may not be a focus, it’s more of a side offering. Local banks are not necessarily experts on other countries’ banking infrastructure.
The ability to handle complex, international payments with full transparency is where a fintech like Inpay makes a difference. We have the knowledge and expertise around particular payment corridors and what’s needed to deliver a successful payment.
We know what documentation is required, the questions likely to be asked, and the quickest way to route payments to pre-empt problems. It’s a different approach and skillset to a bank, who wouldn’t necessarily support and guide customers to that extent.
Inpay is not running a bank or competing with banks. We ensure the banking infrastructure is utilized in the best way. We connect the world with the banks, focus on what we’re good at, which complements what banks are good at.