How Partnerships Between Banks and Fintechs are Changing Banking

Digitization has forced banks to review and change how they approach customer relationships more than any trend in recent memory. Online banking has not only weakened the geographical advantages enjoyed by local banks (while also removing geographical constraints) but also changed how people interact with their bank and the services they want provided while making deposits less sticky - after all, it's a lot easier for an unhappy customer to switch banks when they can open a new account and move all of their money from the comfort of their couch instead of having to go from branch to branch.

At the same time, fintechs have taken advantage of the gaps between these new customer expectations and the services available from their banks to build their own customer bases. Perhaps the most famous example is PayPal, which effectively created the digital payments ecosystem and has since grown into a significant part of the financial services ecosystem, with its Venmo service becoming one of the most popular tools for person-to-person payments. In 2022, PayPal's revenue exceeded that of all but the eight biggest banks in the US.

Given how much money companies like PayPal are making, it's no surprise that banks are increasingly working with fintechs to avoid losing customers and potential revenue. And unlike in the past, these are increasingly collaborative partnerships incorporating the customer-centric approach towards product development that fintechs typically follow.

Open Banking Fueling Innovation

Open banking is one concept fueling fintech innovation and driving traditional banks towards fintech partnerships. Made possible by digitization, open banking allows third-party tools to access a bank customer's data with the customer's consent (today, typically granted by logging into your online banking account) by leveraging the bank's API.

The availability of these APIs has allowed independent companies to develop fintech solutions that banks were unable (or unwilling) to offer on their own. These include well-known areas like payments processing services, credit card programs, spend management tools, and emerging solutions like AI underwriting and risk modeling, allowing banks to leverage multiple data points to more efficiently and effectively evaluate prospective borrowers.

Open banking has also improved the functionality of consumer apps. For example, directly accessing bank account information through Quickbooks makes the job of an accounting department much easier than manually uploading statements.

Banks have even leveraged open banking to collaborate with each other. One prominent example is the Zelle payment network, co-owned by multiple large banks, including JP Morgan Chase and Wells Fargo. Zelle has enabled banks to compete in the payments space against the likes of PayPal by making it easy to send money directly to someone else's bank account without knowing the other person's banking details. The Zelle service is integrated into the web and mobile app portals, giving it an immense competitive advantage when it comes to the ease of reaching customers. As of 2022, 80% of the US population could access Zelle via their mobile banking app, according to the CEO of its parent company.

Torpago-social (2) conflict (1)-73Image inspiration: Wonderful

Fintechs Improving Banking Customer Experience

In addition to increasing the number of services banks offer their customers, fintech partnerships are also helping banks provide those customers with a better digital experience. This could be a more modern website, a more secure portal, or better-placed links to key services that let customers do what they want to do faster.

For example, a bank with an outdated user portal for its business credit card customers can leverage a solution such as Torpago's Powered By to launch an entirely new experience within a few months at a fraction of the spend required to build that program internally. By providing its customers with a modern digital portal that includes customizable capabilities, banks have an opportunity to surprise and delight, increasing customer retention.

Today's customers are also concerned with security, which is understandable given the ever-increasing volume of data breaches. Here, fintechs help with solutions such as authenticator apps, a more secure form of two-factor authentication than SMS messaging.

Increased Marketing Opportunities

With branches no longer as important as they once were, digitization allows community banks are increasingly able to market their services outside of their immediate service area. At the same time, banks are also more able to differentiate themselves from the competition based on the services they offer and the strength of the brands of the fintech companies they partner with.

Regulations make bank marketing more challenging than most other industries, which is part of the reason why many banks tend to limit their marketing efforts to a minimum. In some cases, compliance departments are unable to handle the additional workload of reviewing marketing assets or don't have the budget to hire a specialist. Partner marketing platforms like Fintel Connect assist banks in addressing such compliance challenges through Fintel Check, their AI-driven marketing compliance tool. It automates the monitoring of content and auditing of campaigns, ensuring that any content discrepancies are detected before they come to the attention of regulators. With its rules-based engine, it can effortlessly automate the monitoring process, thereby saving time and effort, and enhancing efficiency and accuracy.

Preparation for Embedded Finance Challenges

With deposits less sticky, customers more demanding and fickle, and the competitive landscape more crowded, the last thing banks need is more challenges to manage. They don't have that luxury, however, as yet another significant risk is emerging risks: embedded finance.

With numerous non-financial companies increasingly incorporating financial services like payments into their products, banks stand to lose even more potential revenue. This is occurring as banks face increasing net interest margin compression that is already set to impact bank profitability. Fintech partnerships allow banks to develop non-traditional revenue streams, such as service subscriptions, which will help boost bank financials while further transforming them away from the traditional banking model of "an institution that stores and lends money."

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