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Fintechs vs. traditional banking: friends or foes?

Global Trends
6 Mins.

Disruptive fintechs have caused traditional banks major headaches, but as challengers and incumbents alike try to cater to the ever-evolving expectations of customers, their relationship is becoming more collaborative than combative

One bigger scale sphere trying to break into an orderly arranged rows of sphere on another side symbolizes how traditional banks have to collaborate with Fintechs.
Collaboration between fintechs and traditional banks will open a world of possibilities for consumers

The banking landscape has transformed in the last decade. The 2008 financial crash sparked a fintech revolution as new challengers emerged to ride a wave of bank inertia, consumer demand for digital services, and huge technological advancement. More recently, the tech giants have begun to move in, racing to provide platforms that consumers will go to for every aspect of their financial lives.

The convergence of technologies, regulatory support for new banks, and enhanced payments infrastructure created a perfect storm, fueling the rise of fintech companies. When challenger banks such as Starling Bank, Monzo, and Revolut first launched, much of the industry reacted with skepticism, buying into the idea that customers could not be tempted away from the enduring relationships they had with their bank. Proving these archaic beliefs wrong has been crucial to the success of fintechs.

During the latter part of 2018, as neobanks gained significant market share, commentary shifted from whether challenger banks would survive, to which challenger banking model would triumph, marking a pivotal moment for competition in financial services. Since then, digital banks have continued to grow and evolve, showing that consumers are expanding their thinking when it comes to what they want from their bank and who they trust with their money. Many challenger banks have matured so much that they’re now held to the same standards expected of more established players.

Changing the customer relationship

Challengers may not yet be profitable, but they have fundamentally changed the customer relationship – from communicating in a more open, regular, and transparent way, to offering convenient accounts accessible at the touch of a button and with quick, remote onboarding.

Traditional banks, meanwhile, have found themselves on the back foot when it comes to delivering the customer experience and usability of challenger banks, which offer flexible and versatile banking options that support and reflect consumers’ lifestyles and behavior.

Many of their legacy customers are expensive to service, preferring branches and checks. Some never want to move to a digital platform and contribute very little by way of profitability, yet banks must still fulfill their responsibilities to them while also dealing with staff trained to operate physical branches, as well as systems and key performance indicators aligned to servicing the status quo.

Establishing banking brands

Framing the future of banking as fintech versus traditional banking is not as neat a comparison as it might seem. Many fintechs are well on their way to being established banking brands, and traditional banks are investing heavily in innovation programs. “The wider debate regarding the long-term viability of both types of businesses will largely be settled by profitability,” says Julian Sawyer, managing director at Gemini, a cryptocurrency exchange. Balancing customer centricity and the ability to make money in a sustainable way is going to be key.

“The wider debate regarding the long-term viability of both types of businesses will largely be settled by profitability.“
Julian Sawyer
Managing Director, Europe, at Gemini

Recognition from banks of the need to keep up with the evolving financial landscape is reflected by the number of open banking partnerships they have already formed with nimble fintechs to help accelerate innovation and realize their objectives. Recent research from open banking platform Tink found that 69% of European financial institutions increased their number of financial technology partnerships in 2019.

The advantages of partnerships go both ways. For big banks, access to emerging technology and innovative new ways of working could help boost their competitive edge and swiftly meet changing consumer needs. For fintechs, partnering with large financial institutions can support their own growth ambitions, opening up access to finance and customers that far outstrips what they could build alone.

“With COVID-19 accelerating the shift to digital channels, customers are ready for a major overhaul in how they access and consume financial services,” says Rafael Plantier, UK and Ireland country manager at Tink.

Convenience of smartphones and social media

Banks are learning that the competition when it comes to customer experience is not other banks or even fintech players. Customers don’t benchmark their finance provider against other finance providers – they compare them with the experiences they enjoy on their smartphones and social media networks. As the lines between banking and tech industries increasingly blur, banks and fintechs alike know that their customers want convenience and simplicity. Application programming interfaces, or APIs, are crucial to enabling them to work together to meet these expectations.

Banks’ vast insight into people’s lives brings huge potential for new products and business models. This is where partnerships between fintechs and banks are important. Banks bring scale – in customers, trust, and data – but fintechs bring agility and innovation.

The financial services landscape has advanced wildly in the last 10 years due to the fierce competition fintechs have brought to traditional banking. The next phase of innovation, however, requires the two to come together. By combining traditional banks’ sheer scale and vast access to data with fintechs’ agility and pace of innovation, both can form a collaborative force that meets consumer expectations and fights off the threat from the encroaching tech giants.

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