Table of contents
This David-versus-Goliath narrative has now reduced to a hackneyed dinner-table conversation. Banks have, for far too long, underplayed fintechs as underdogs, even as they siphoned off $8 to $10 billion in annual revenues in 2020. And it didn’t take a pandemic to make things worse for banks. In 2018, the growth in global lending stood at 4% - lowest in five years, and since then, banks have been bleeding with capital that’s harder to lend (read monetize) and more expensive to manage. On the other hand, fintechs are having a moment, but they have been known to frizzle out faster than they can make a mark.
This is not a discussion about who wins. There is enough literature that trumps one party over another. I am advocating for a truce – a collaborative model where banks tone down the hubris and fintechs don’t become rebels without a cause. This is about levelling the field where everyone plays to their strengths and prepare the ground for a banking renaissance that’s been long overdue.
Here are five reasons why a bank-fintech partnership can create the right ripples:
Technology prowess meets muscle power
This one’s a no-brainer. Incumbent banks are encumbered with a decades-old technology stack (a white elephant no one want to address). Fintechs can plug in easily consumable technology nuggets (also known as APIs) to spur banks on a digital transformation journey. Of course, APIs wouldn’t begin to scratch the surface for the internal overhaul required by banks, but it’s a start. It will help them reimagine processes for the next-gen customer, making the segue to a leaner, more streamlined workflow. For fintechs, with all their tools and technology, banks can bring in the ignition with domain-specific direction and capital required for scale and speed.
Captive user base meets new acquisition channels
The name of the game is customer centricity. Fintech have unleashed digital innovation in traditional banking processes, with technology such as optical character recognition, intelligent automation and alternate data models. These need to be honed over time and with scale. Banks can plug in their captive user base and help fintechs touch base with the real-world scenarios. On their end of the deal, fintechs can help banks tap into new acquisition channels, servicing the new-to-banking customers that can now be vetted with alternate data sources. This will help diversify the already-saturated customer base for banks and bring digital platforms such as Amazon or Shopify into the bank's fold.
Point solutions evolve into touchpoints
For banks to stay relevant going forward, they need to play a greater role across the customer journey. They will have to step away from the monolithic mindset that makes them rigid and stuck in time; evolving into a nimble, agile (maybe invisible) organization that enables customers to access credit when they need it. Point solutions, such a mobile banking application, will not cut the mark. Banks need to be present at each touchpoint in the customer journey – from the merchant app to the payment gateway to the short-term credit provider. Fintechs can help them with customer behavioral insights and granular data analysis to identify customer need, context and credit appetite – all in near real time. They can also enable intelligent risk engines that cut down the loan approval journeys to one-tenth of its traditional length, helping banks disburse higher loan volumes within minutes.
Cold touch moves to warm touch
By nurturing customer relationships with curated offerings (personalized credit products lent out at customized interest rates), banks can pivot away from a cold touch approach – wherein they land on a cold lead and pursue it for loan products. Data sourced from alternative sources, analyzed in real time, can help banks identify who needs a loan, when and for how much, and pitch allied services. This leads to better conversion rates and higher customer engagement. Fintechs can deploy their data models across the customer journey – from pre-purchase to post-purchase – to qualify prospective borrowers based on their credit utilization and discipline. Banks can come in at the right juncture, offering a credit line and helping conclude an interaction with a transaction.
Marry data security with regulatory compliance
The most crucial entry barrier for innovation in the banking space is data security and balancing the scales on regulatory compliance. Banks digitizing customer data will have to enforce robust security mechanisms – from data sourcing, processing and storing standpoint. Fintechs can help them onboard mission-driven technology and help deploy biometrics, data encryption and masking. For fintechs, banks can bring in regulatory management that steers them in the right direction and helps them self-regulate based on best practices. This will set the blueprint for regulation that will standardize the market.
How bank-fintech synergies will transform banking into an experience
Coming together will help banks and fintech usher in the needed change in mindset – pivoting away from a service-based to a product-first approach. Customer centricity will become the northern star, guiding product lifecycles, sales and marketing funnels and brand development.
Consequently, banking will become context-driven and not remain straitjacketed with a one-size-fits-all outlook. This will also help banks lend money to new customers, customized for their needs, and technology can sway unit economics in their favour. Alternate sources of data, bolstered with a deeper smartphone penetration, will help fintechs hone their intelligent engines across risk, compliance, pricing, decision and recommendation. This can make loan journeys optimized for each borrower, while containing credit risks. Or as I said at the very beginning, a win-win for all.