Traditional banks and Fintech firms: new collaboration models

An explosion of new players in markets usually, in the best of cases, means a warning shot for traditional competitors, and in the worst cases, a fierce fight to maintain or expand market share.

But in the case of financial services, it seems that close collaboration between banks and Fintech firms is gaining ground, and rightly so.

Fintech firms are focusing their initial efforts on the most profitable areas, such as payment methods and consumer or retail banking, sectors where they are developing greater awareness of consumer behaviour, new business models, and disruptive solutions.

But traditional banks also have their part in the equation, as they enjoy more credibility and trust from consumers. Also, traditional banks tend to have more resources to implement and test solutions developed by Fintech firms.

So, what has pushed the financial services sector to seek collaboration with Fintech firms? In short, Fintech firms have a lot to offer traditional banks in their digital transformation, since new solutions translate into better knowledge of the customer, leading to more and better cross-selling, and therefore additional income, reduced costs, new opportunities for growth, and better preparation to compete in the long term.

What are the new collaboration models between banks and Fintech firms?

Although the data indicate that new models involve close cooperation, it seems that the financial services sector is not ready for integration and still has a conservative approach.

Partnership agreements
The current most successful model is a partnership agreement with Fintech firms, by which an agreement is made to use or acquire a solution developed by the Fintech firm, or for the institution to contribute in part to its development with its historical knowledge of the sector.

The most representative example of this model is the ecosystem created by Matchi, where financial companies connect with Fintech firms from around the world. Some leading companies, such as CitiBank and CaixaBank, are Matchi members.

Another known partnership agreement is between Paypal and Discover Financial Services, where customers are allowed to pay with their PayPal account.

The way these models are set up is key for Fintech development: in exclusive agreements for an institution to acquire the solutions developed by a Fintech firm, the model may limit the Fintech firm’s growth, since it restricts its activity in other markets, and of course with other banks.

Start-up incubator programmes
Secondly, the most widespread collaboration model is perhaps the start-up programme oriented toward developing Fintech firms. In this case, the institutions finance the programmes and benefit, through various types of agreements, from the developments achieved. Some examples of these programmes are the Fintech Innovation Lab, Innotribe@SIBOS or Startupbootcamp.

Buying and selling services
Another model is the buying and selling of services to Fintech terms, a low-risk approach to joint development of new solutions. Within this model, the most widespread collaboration approach is white labelling: an institution buys a service or product from a Fintech firm and implements it under its own brand.

Financing or acquisition of Fintech firms
Finally, the least widespread form includes collaboration models with a more integrative focus, where the institution finances the Fintech firm or the development of a product or service, or the acquisition of the Fintech firm by the financial institution. This last model requires assuming more risk, or at least having shifts in focus be more integrated into the business culture.

Some financial institutions have opted to develop their own programs by creating labs. For example, DB Global Technology from Deutsche Bank, based in Silicon Valley, collaborates with the University of North Carolina to research and develop new ideas, and CapitalOne has created three Innovation Labs in New York; Washington, D.C.; and San Francisco.

But, despite the fact that collaboration models are very promising for the financial sector, there are some concerning factors when implementing them, especially those related to digital security, and those regarding the differences between business models, business culture and management models, and operations and processes of the Fintech company and the financial institution. All of this combined with legal regulations or confusing and/or insufficient regulations, still give pause to some institutions.

Nevertheless, the data from the recent PWC study are clear: 61% of financial companies believe that in the next five years more than 60% of their customers will use their mobile device to access financial services.

Thus, the financial institutions that are most prepared for the current and future changes in the sector will be those that combine the best of traditional banking with the best of Fintech, focusing on the user and offering an optimal combination of technology, user experience, and personalised care and communication.