The banking industry is traditionally quite slow in integrating new technologies. This is because it is more difficult for traditional banks to adopt some of the latest technological developments since they need to comply with more extensive regulatory requirements. Moreover, banks need to convince a greater number of stakeholders when adopting new changes.
On the other side, fintech is a new financial industry that applies technology to improve financial services. Having a leaner virtual operation, more flexibility as a result of not being as heavily regulated as banks, allows fintech startups to attract customers with competitive pricing and enhanced customer experience, which is the key to their competitive advantage. A lack of legacy infrastructure and comparatively low levels of organizational complexity often enable fintech firms to be more agile and to innovate faster.
At the same time, banks have gained the trust of their consumers over the many years they have been operating, so how does one combine these two powers together? Some people consider fintech to be competing with banks, while others consider them to be complementary to each other. I strongly agree with the second opinion. Using the learning and observations I have made throughout my journey with Fawry from inception to a billion dollar market value. I will try to break down how banks and fintech startups can work together to truly unlock the potential of fintech in Egypt in this three part article series.
Why Fintech Startups Want to Cooperate with Banks?
Let’s first explain why fintech startups want to form an alliance and cooperate with banks. For startups, partnerships with financial institutions provide access to funds for future growth. With joint efforts, their businesses will more likely be scalable and sustainable in the long run. Through an alliance with an established player in the financial industry, fintechs can obtain access to a broader customer base and can attract new customers more easily. Banks are trusted brands, and customers trust their banks more than fintechs for keeping their money safe. Therefore, associating the fintech’s name with a bank’s name, will give customers more trust to deal with the fintech, as well as enhance their own brand awareness and reputation. Banks also have unique knowledge about their customers, due to the mandatory KYC (Know Your Customer) process and their ability to access all their customers’ financial transactions. This in turn allows fintechs to propose a geared value proposition to the bank’s customers.
Banks also have ages of experience in risk management, compliance, and security regulations. So that banks can give fintech startups knowledge on dealing with financial regulations. Finally, banks have all the infrastructure needed by fintech startups to operate in place, such as processing, clearing, settlement of payments, securities, etc. are all in place. It is therefore understandable that these factors have led fintech startups to see partnering up with a bank as a necessary step to scale and expand.
Why Are Banks Worried About the Boom of Fintech Startups?
Some banks consider fintech companies as competitors. Such banks are competing head-on with fintech companies which can deliver innovative customer services faster and cheaper. However, this approach doesn’t appear to be very successful in my opinion, because a single organization such as , a large bank, might not be able to effectively and efficiently provide many of the financial services consumers want.
Other banks are weary and restrictive, because they fear that the integration of fintech startups with its legacy systems can cause the emergence of new, unforeseen risks like compliance risks, operational risks, cyber risks, and more, however, this concern can be easily mitigated with well-defined and managed integration layers.
The most valid concern, in my opinion, that makes some banks more resistant to cooperate with fintech companies is the customer ownership; the party managing the customer relation will not only take most of the profits, and customers loyalty but will also gain access to the customers’ data, which can be used to fine-tune and personalize the customer experience and increase cross-selling opportunities.
So, Why Should Banks Align with Fintech Companies?
The main driver for this alliance is the changing demands and requirements of banking clients asking for seamless, personalized financial services. Customers are demanding a multi- and cross-channel experience.
This requires the experience to be customer-centric, as opposed to the product-oriented approach currently offered by most banks. At the same time, fintech startups have gained significant traction, by successfully offering innovative products and distinctive solutions to meet consumers’ demands.
Another driver for this alliance is the rapid technological evolution taking place in the industry (IoT, Big Data analytics , real-time customer analytics, AI, blockchain…) make it almost impossible for a bank to invest (and be at the top) in all new technologies. Partnering up with specialist companies is therefore almost a necessity to stay ahead of all those tech disruptions. Some banks use this form of alliance to outsource their innovation activities to fintechs and other partners for ensuring digital transformation. In my opinion, the most important factor for banks to secure a competitive advantage is collaborating with fintech companies that are developing or have already developed a better way to provide financial services. I will be explaining in my next article the different shapes such a collaboration should take.
If you see something out of place or would like to contribute to this story, check out our Ethics and Policy section.