Banks to beef up their collaboration with FinTechs for innovation

In the coming years, banks will even more closely work together with FinTechs. With agile new competitors eating into their market share, many banks do this mainly to gain speed in innovative technologies and combat this trend.

Traditional players in the banking industry are often able to trace their roots back centuries. These oldest institutions have weathered various storms, including a global financial crisis largely attributed to their policies, along with continued arrivals of new, innovative competitors in the sector – from credit unions to internet-only banks. However, rapid advances in the financial technology space mean that traditional banking institutions find themselves increasingly open to potentially disruptive competitive forces.

The FinTech sector, a new industry, which aims to compete with traditional financial methods in the delivery of financial services by leveraging technology to adapt with agility to a rapidly shifting market. Given the difficulty of market access, as well as regulatory requirements, however, both FinTechs are keen to collaborate with traditional banks.

On the other side of the divide, while nearly half of executives in financial services see FinTechs as a ‘significant threat’, a majority believe that they at the same time offer opportunities for partnerships / collaboration. A pathway to innovation is regarded as the main driver for joining forces with FinTech players. As a result, such collaborations are becoming ever more prevalent.

To this end, a new report from DLA Piper has shown just why digital transformation in the financial services sector is so important. When banks works with Fintech, they mostly do so for innovative technologies, with four trends in particular standing out from the rest. These are payments, blockchain, analytics, artificial intelligence (AI). 41 % of financial services executives polled by DLA Piper said they believed payments were the most important area to apply FinTech in. 27% of those surveyed said their second top priority was blockchain, while just under 20% said that data analytics and AI were their second or third priorities, respectively.

Key trends

The value of applying FinTech in the payment arena is evident. Banks facilitate billions of transactions globally every day, and so optimising that process is a major efficiency driver. 17% of participants said innovation been most prevalent in the payments sector in mobile wallets and payments within the payment sector, while almost as many participants (14%) consider that there has been most innovation in digital tokens and cryptocurrencies. At the same time, another 14% identified real-time payments as the area of the greatest innovation.

Elsewhere, open banking represents a seismic development in retail banking, because it allows third-party FinTech firms access, for the first time, to consenting bank customers’ data. Open banking was initially driven by the UK’s competition regulator, the Competition and Markets Authority, while similar initiatives are occurring in Germany by the Berlin Group, and in other EU countries – though these are currently progressing more slowly than in the UK. The key is that, armed with this data, authorised app developers can now offer innovative products and services to bank customers, such as account aggregation or payment initiation services. Rival banks can also potentially access other banks’ customers and offer innovative new solutions.

Martin Bartlam, International Group Head of Finance & Projects and Global Co-chair of FinTech at DLA Piper commented, “Payments technology is set for profound transformation in this new era for the financial services industry. This concentration of investment in payments tech makes sense in today’s digital era, as it represents the interface between financial services and its client base, so is likely to be highly impactful on a number of levels, from customer experience to transactional efficiency.”

In terms of blockchain, when asked for which what applications, if any, respondents’ organisations were utilising blockchain/distributed ledger technology, either as a pilot or completed project, the most populous portion of 38% said administrative systems and processes, including back office processes. Following closely behind, distributed ledger technology was being used by 32% for payment and settlement. However, across the financial sector landscape, take-up remains generally low, with some detractors seeing blockchain technology as a solution in search of a problem which can often be fixed via other means.

DLA Piper’s survey also revealed key strategic opportunities developing across the industry through the use of advanced data analytics and AI to better commercialise and monetise vast amounts of data which organisations hold. The analysis shows that banks, financial services companies and FinTechs all plan to undertake a range of data driven initiatives in the following two years, with 35% planning to better utilise and monetise data in the next two years. That figure rises to more than 40% when just factoring in banks, who have access to a glut of valuable customer insights through the large amounts of data they hold.

AI and machine learning are likewise a higher priority for retail banks, with 32% naming it as a top-three priority, with its potential applications limiting the amount of time smaller disruptive banks need to spend on low value adding activity and administrative procedures.

Retail banks versus investment banks

In this regard, there are of course a number of differences in priorities between retail banks and investment banks. DLA Piper’s study reveals that while blockchain is a core item on the agenda for both investment and retail banks, there is a significant gap as to how much of a priority it is, with 50% of investment banks and 32% of retail banks citing it as one of their top three issues. InsurTech, at the same time, ranks as investment banks’ second-highest priority, whereas retail banks do not see it as a priority. Investment banks meanwhile do not appear to be concerned with mobile tech, at a mere 10%, while 53% of retail banks regard it as a top-three matter.

The authors in the study also looked at how exactly banks want to work with Fintechs, and vice versa. More than a quarter of financial services companies plan to engage with FinTechs through partnerships, collaborations or joint ventures. On top of this, 19% plan to invest in FinTechs, either directly or through their corporate venture capital (CVC) arm, and 13 percent plan to acquire FinTechs on an outright basis. Appetite to participate in FinTech programs such as accelerators and hackathons is more limited, however, even though it is prevalent in key cities/areas with strong technology hubs, such as London, New York or Silicon Valley.

Partially, this may be because banks and FinTechs can find it difficult to match their cultures, or to work together at all. Banks’ procurement and approval processes are the greatest challenge for 30% of retail banks trying to work with FinTechs – more than twice the percentage of the second most important obstacle. Similarly, FinTechs cite this as the second most significant hurdle to partnering with financial services companies. This is a major concern for FinTechs, as it is not uncommon for an early-stage FinTech to fail, as a result of being caught in a bank or financial institution’s procurement cycle, which may take a year or more to get final approvals from the appropriate decision-makers.

These problems are less of a factor with investment banks, however. Due to their more offensive approach to business, these entities appear to be far less worried about procurement, with only 8% of investment banks citing procurement as one of their top three obstacles to engaging with FinTechs – in contrast to 50% of retail banks.

Regulatory and compliance obstacles banks and financial services organisations also face a number of regulatory obstacles when partnering with FinTechs. Banks highlight this as the joint-fifth greatest challenge to engaging with FinTechs, which in turn cite it as their fourth most important obstacle. Simultaneously, concerns about a FinTech partner’s potential insolvency is a large challenge for 23% of investment banks, making it their highest-ranked obstacle to forming partnerships. Meanwhile, cyber vulnerabilities mean 38% of investment banks and 25% of retail banks say FinTechs’ cyber vulnerabilities are a significant challenge. Despite these factors, however, as banks and financial institutions look increasingly to upgrade their customer experience and data handling times, FinTech partnership is likely to continue to grow.

Global Co-chair of FinTech and partner at DLA Piper, Anthony Day, said of the overall study, “There is no question that companies must continue to evolve their digital capabilities to survive. While there is strong evidence to suggest we are entering a period of unprecedented acceleration in the digitisation of financial services, there are a number of regulatory and procurement obstacles to navigate. And while it appears the will to collaborate is there, there is most definitely room to develop a clearer understanding of how financial services companies and FinTechs can more effectively work together in complex, regulated markets.”