- Sirada Lorhpipat, CDI intern
Fintech partnerships in the Open Banking era
There are both positive and negative outlooks regarding partnership prospect between incumbent banks and fintech startups. There is a huge potential for banks to partner up with fintechs since fintechs can help banks offer specialized services and improve customer experience. By acquiring the technology and customers from fintechs, banks can bring products to market faster and save time and resources to develop the products themselves. Incumbent banks may perceive some fintechs as threats, so strategic partnership can help prevent them from being disrupted and retain their share in the market. With large customer bases and strong brand credibility, partnering with incumbent banks can help fintechs to test their product in the market, to obtain proof of concept, and scale their business quickly.
However, many startups face common problems and limitations in their partnership experience with larger banks, such as integrating services with legacy systems, long decision-making processes, and internal bureaucracy that creates friction in the partnership. Incumbent banks also view early-stage startups as risky investments, causing corporates and big players to shift their partnership targets towards more mature companies, such as scale-ups and tech giants instead. Scale-ups, in this sense, are more mature startups which have already received seed or series A funding, indicating more growth potential and greater opportunities for adding value to banks. Some tech giants also have venture capital units that curate and screen deal flows for banks since tech giants have a wider connection with technology companies.
While incumbent banks are trying to prevent themselves from getting disrupted by fintechs, they face stronger competition from rising challenger banks and tech giants who are penetrating this space. Challenger banks offer their banking services through mobile applications which are becoming popular among millennials and frequent travelers due to unique offerings, such as competitive exchange rates, low transaction fees, and robo-advisory services. They aim to offer faster services and better customer experience than incumbent banks and make use of open banking standards, such as analyzing spending habits from expenditures and savings data. Challenger banks also have the potential to form successful partnerships with fintechs due to similar startup cultures and lean business models. Tech giants with their large consumer bases and presence in the retail market may also apply for banking licenses in the future which has the potential to attract a great deal of attention.
To facilitate collaboration with fintechs, banks should encourage more internal communication and education about fintechs, set up internal deal curating teams, and encourage customers to share their data to take advantage of open banking standards. Banks should also understand the nature of startups, what startups need, their strengths, their weaknesses and their limitations. They can help startups to manage internal processes, shielding them from internal bureaucracies. It is also important that banks are do not try to impose limitations on startups’ market expansion such as requesting for exclusive partnerships or excessive control in the business.
Banks could establish their own internal deal outsourcing team to curate startups instead of relying on tech giants to curate deals for them. Partnering with tech giants may turn out to be ineffective if those tech giants ultimately become competitors, providing a better service for customers. Banks know their needs and business model better than tech giants do, so it is important that banks find the right business partners that would be a good fit for themselves.
Although the difference in the structure and operation of large organizations and startups often make it difficult to form strategic partnerships, finding common connecting points can be a catalyst to foster collaboration. Ultimately they are both aiming to better customer experience, retain consumer loyalty and build trust for data sharing from consumers. The open banking initiative may prove to be a suitable opportunity to connect in offering customers the best service.