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What Can Fintech Startups and Banks Learn from Each Other?

Blog Fintechs 1

Both are great at what they do but both need something more that they can get by looking at each other's strategies... How can they become more like each other?

When fintech companies make a pitch for new business, they tend to focus on everything that traditional banks do wrong. They claim that traditional financial institutions are slow to innovate, that they don’t have the needs of the customers at heart, that they’re too big to be really responsive.

Banks, on the other hand, respond by claiming that fintech firms cannot really be trusted with your money, that they’re more interested in growth than stability and that they will struggle to scale in any meaningful way.

There is enough truth in both points of view to keep consumers a little off-balance and unsure of how to invest. But the truth is that both fintech startups and traditional banks have a vital role to play in the economy, and that future growth is far more likely to develop by learning from each other, and adapting the best features of the other to present a more complete set of products and services.

The Stability of the Banking System

There have been periods of extraordinary growth and periods when the whole system seemed to be under threat. But the global banking system has weathered all the storms and has played a large part in the spread of wealth around the globe. Naturally, there are huge issues of access to capital and uneven distribution of wealth to address, but the system itself is built on a solid foundation.

The 5 attributes of a traditional bank which are hard to replicate:

  • Large customer bases
  • Capital
  • Resources
  • Strong brands
  • Deep expertise in managing risk and navigating regulations

The fact of the matter is that banks are still getting right, and even though they have been slow to adapt, they are getting better and better at providing digital services and working with 3rd party firms to make better use of the massive amounts of data they collect.

The scale and reach of large banks is easy to forget when the news media tends to focus on the latest innovations and disruption by a fintech startup. But at this stage, banks and fintech startups are living in different worlds.
Writing for Forbes magazine, consultant Enrique Dans explains that “A service with strong growth like Revolut, for example, expects to reach three million customers by next month, which is nothing to Santander’s more than 113 million customers in more than ten countries worldwide.”

In a certain sense, it’s ridiculous to even be comparing them. But, as the music industry discovered in the 1990s, and video discovered a few years later, when disruption happens, it can escalate quickly and before you know it, a serious threat is posed to your business model.

Image Credit: Shutterstock

Fintech’s Underdog Advantage

There is a lot to be said for being small and nimble; for being able to focus on a couple of products and services and to do them really well, for really knowing your consumers well, understanding their mobile-first lifestyle, and building products that speak to that and on which you rely for your very survival.

With the convergence of the cloud, big data, mobility and social networks, fintech firms around the world have developed a remarkable array of incredible offerings which are changing how people think about finance and the ways that they manage their money.

Shine is a bank built exclusively for freelancers working in France. Revolut offers a no-fee foreign exchange card plus travel insurance. German bank N26 is leveraging artificial intelligence to create a smart banking experience.

No matter where you look, there is innovation and a new suite of products nibbling away at the very core of traditional banks.

How can we achieve the best of both worlds?

What is needed now is an honest and open look at the strengths and weaknesses of both sectors, and some crossover that will benefit everyone in the long run.

Initially, there are three principal areas of cross-over that could deliver major benefits to both sectors, and to consumers.

  1. The Arena of Regulation: Banks understand how difficult it is to deal with complex financial regulations. They’ve been doing it for years and they understand why it’s necessary, and how to get approval in both the U.S and Europe. Mistakes can be very costly and can even strike at the heart of a company’s financial viability. For example, the cross-border payment specialists Transferwise had to repay over $16,000 in customer fees after running afoul of regulators in New Hampshire.

    “The reality is that in most cases, the easiest path through the regulatory minefield will be for fintechs to partner with the very institutions they’re supposedly vying to replace”, says James Hickson for “By working with banks, fintech startups gain the wisdom of a more experienced partner, as well as access to ‘dumb pipes’ for money transfer and the like that are already compliant with regulations.”

  2. Change Their Approach to Risk: It’s well known that fintechs are far more likely than banks to say ‘yes’ to a new idea. Most of them are in a stage of the cycle where they need to show expansive growth in users which makes them more likely to take on riskier propositions. They would do well to take a leaf out of the book of traditional banks and not try to emulate other tech firms who have less at risk financially. Steady, solid growth should be far more desirable in this economic climate.

  3. Reflect On How They Present Themselves: Banks need to take note of the fact that fintech firms are able to charge monthly fees without being labelled as exploitative or unfair. By offering a ‘freemium service’ on some products, then charging fees on more advanced features, fintech firms build strong relationships with clients that banks can learn a lot from.

Ultimately, the way forward is for banks and fintech startups to partner up, use each other’s assets, and learn from what they don’t have. The financial sector is big enough, and robust enough, for all players to take a slice of the pie and grow financial services around the world for everyone from the unbanked to the wealthy and the middle-class too.

AIFoundry works extensively with both banks and fintech startups to offer breakthrough technologies that ensure they are getting the best out of their data and maximising their potential. Get in touch to find out more about what we can do for you.