When looking at the fast-paced world of fintech, digital and other innovations, it can feel a little overwhelming. Where do you even start? It's an exciting time to be in the financial services sector. Technology is disrupting how we bank and transact as well as how we access and store our money. New players are emerging daily, old players are rebranding themselves as new, and fintech partnerships are popping up all over the place. To help create clarity amidst all this change, we started Fintech & Innovation Ltd., a boutique consulting firm that specializes in working with clients who want to partner with or invest in firms that operate in the fintech space. Over the last year, we have advised numerous organizations on their partnerships, investments, and public involvement in fintech innovation.

Disrupting the Financial Services Industry

There has never been a better time to be in the fintech industry. New and innovative technologies are disrupting all aspects of the financial services industry. In some cases, it's as if fintech firms are using their disruptive natures to transform the very nature of financial services themselves. This has created a lot of excitement within the industry, but it has also caused a huge amount of confusion. There are so many different types of fintech firms it can be difficult to keep track of who does what. There are firms doing everything from advising on investment ideas to providing the latest in blockchain technology. To make matters even more confusing, many of these fintech firms are working together, collaborating with one another in a way that has never been seen before. This has created a highly collaborative industry, one in which the lines between fintech and the financial services industry as a whole have become almost completely blurred.

Value of Fintech in a Traditional Bank

There are many fintech that is creating solutions that are designed to integrate with and even replace aspects of a traditional bank's operations. In some cases, these fintechs are partnering with banks in order to provide a better service to the bank's customers (e.g., providing better online authentication or fraud detection). In other cases, they are creating functionality that a bank can buy and put on top of their existing infrastructure (e.g., providing a new type of investment advice algorithm or a new blockchain network). In both cases, there is definitely value for the bank in partnering with the fintech. Partnerships often bring new customers to the bank, customers who would otherwise not have chosen the bank. In many cases, these new customers are often the bank's most valuable, as they are attracted by innovative solutions that the bank does not have.

Why Banks Should Partner With Fintech

In addition to acquiring new customers, partnering with fintech can help banks create better products, provide their existing customers with better services and save money through increased efficiency. The ability to develop better products comes from the fact that fintech is often not bound by the same restrictions as banks. Banks must follow very strict regulations, meaning that they often have only one solution for each service. Fintechs, on the other hand, can create many different solutions for each service, each with varying segments of customer in mind. A customer service solution designed by a fintech might be much better suited to your specific needs than the bank's solution.

Why Bank Employees Should Be Skeptical of Fintech Partnerships

Even though a partnership with a fintech has the potential to benefit a bank greatly, bank employees must remain vigilant. After all, this fintech is competing against banks for customers. If a customer finds a better solution from a fintech, they might not come back to the bank. Bank employees are well-versed in the world of banking. They know all the services offered by their institution and how they compare to other banks. They can see any benefits that might be provided by a fintech partnership, but they might not be able to see any downsides. This is especially true if the fintech is proposing some partnership that the bank could buy. In this scenario, the partnership seems like a one-way street, with the bank getting the benefit and the fintech receiving nothing in return.

When Bank Employees Should be Skeptical of Fintech Investments

The same can be said for fintech investments. Bank employees might have an idea that would be a great investment for the bank, but their idea might be something that is already being done by a fintech. In this scenario, the bank should be extra careful when researching the fintech investment. It should be prepared to see that the fintech is already much further along than the bank's idea. If this is the case, bank employees should ask themselves why they are investing in the fintech instead of creating the product themselves. The same is true in the other direction. If a fintech wants to invest in a bank, it should carefully examine the potential return on investment of its investment. If the investment is sound but not guaranteed to succeed, then bank employees should be skeptical. If the investment is guaranteed to be successful, then bank employees should be skeptical of the risk involved.

Why Banks Should Make Investments in Fintech Startups

The best way for a bank to truly profit from fintech partnerships is to invest in the fintech itself. By doing this, the bank has a direct stake in the fintech's success, which increases its motivation to succeed. It also gives the bank access to the fintech's assets, allowing it to cash in on any profits if and when the fintech is acquired. Investments in fintech startups are also a great way for banks to stay ahead of the competition. Banks often have very conservative cultures, meaning that the risks of investing in a new fintech are often too great. Investing in a fintech means that the bank must bet on the success of a startup, but it can also reap the rewards when that startup succeeds.

Conclusion

Fintech is a booming industry, and it doesn't show signs of slowing down anytime soon. For financial services companies, the benefits of partnering with or investing in fintech startups are clear. These firms are often cheaper, faster, and more innovative than traditional institutions, and they provide real value to the end user by improving their experience. Likewise, the benefits of partnering with fintech firms are clear for banks and other traditional financial institutions. By partnering with fintech, banks can acquire new customers, improve their products, and increase efficiency.