The thought of “coming together” and “partnerships” have historically not conjured up images of banking, yet, today, the banking sector is very familiar with these terms. Banks face fierce competition competition from countless specialist digital fintechs, with the ability to adapt and innovate quickly to solve customers’ specific problems. Efficiency is at the core of fintech.
For banks, built around largely domestic, in-person legacy systems, the challenge fintech poses is increasingly existential. According to estimates from McKinsey, banks must make cost improvements of 30 per cent across customers’ experience and payments in order to sustain investment and profitability in the competition with fintech.
As a consequence of this tension, many more banks are partnering with fintechs. These partnerships allow customers to access fintech products through their own banking platform. For example, Minna Technologies partnered with several banks, including Swedbank, to help customers manage their subscription payments. A partnership between Barclays and Flux gave customers access to itemised digital receipts for their purchases within the Barclays app. At Wise, we not only partner with digital banks, but also incumbents like Shinhan Bank, the oldest and second largest bank in South Korea, where we power international payments for their customers.
These partnerships allow banks to build game changing customer experiences by bringing fintech products into their offerings. The process is quick, with products launch in a matter of months rather than years. It saves banks the burden and uncertain outcomes of building their own product and the cost of maintaining it. Traditional banks’ scale is combined with the agility of fintech, enabling banks to stay abreast of change. Customers gain and banking becomes more vibrant.
But we’re just at the start of these sorts of partnerships. Banks should use partnerships to improve the parts of their business they currently do not prioritise.
Take consumer and small business international payments. Banks were founded to provide domestic banking services like mortgages and loans, so low value international payments are often seen as non-core offering. Banks choose to invest in mortgages, loans and other core services, which they remain leaders in, while leaving alone lower priorities. Our lives have become more international but international payments system are lumbering, due to the lack of focus banks put into this area.
Customers now expect more. This is shaped by a world in which taxis and takeaways take one click, and emails travel the globe in seconds for free. Recent regulation has followed suit – CBPR2, requires providers to be far more open about the costs they charge for international payments. Yet many banks are struggling to meet these expectations. Doing so demands huge expense and heavy investment in existing infrastructure – something that is hard to do if a service isn’t a strategic priority.
Ignoring problems isn’t an answer. It risks losing customers, and not just from lower priority services. Once a customer tries one fintech product, they are more likely to try others. A Wise customer can easily then use Plum, Monzo, or any other fintech, as they become accustomed to a new way of handling their finances. So a bank’s business model is gnawed away, until even the core sectors are under threat.
Rather than face death by a thousand fintechs, banks can use partnerships to meet customer expectations across their business. They can build products to defend the core parts of their business, while using partnerships to help the other areas. Resources become focused. Customer expectations are met with partnerships that are rolled out quickly and easily. Plus, the sector gains from the innovation that comes from established providers working with younger entrants.
Whilst it is good news that more partnerships are starting to emerge, we should be seeing more. When well executed, partnerships allow both fintechs and banks to thrive. It’s time to come together.