October 26, 2016 // By Magenic
Legacy, meet innovation.
In recent years traditional banks and FinTechs have gone head to head, with banks struggling to match FinTechs’ technological innovation and FinTechs pining after banks’ established customer bases.
The solution for many has been to combine forces, such that each is able to optimize the other’s strong points. A study this year reveals 17.8 percent of banks have already acquired FinTech firms.
But not every collaboration works. While banks are under pressure right now to hold on to their pieces of the financial services pie, they still must be selective about their choice of partners, taking a good hard look at the long-term impact on their organization. After looking at the options, many banks choose in-house improvements instead; as of last year, 7 percent of banks worldwide had launched FinTech subsidiaries in response to competitive pressures.
Banks weighing the pros and cons should consider the following before establishing such partnerships:
Opportunity cost: What’s likely to happen if we neither create our own solution nor partner with a FinTech?
Cost effectiveness: Would a merger be less expensive in the long term than building the same capabilities internally? Banks must be realistic about the expense, time and disruptiveness of building their own high-quality solution(s).
Overlap: Might the collaboration have an adverse impact on existing products and services, or is it likely to create its own separate revenue stream?
Longevity: How long will the FinTech’s platform or solution be important to the financial services industry? How soon might it be replaced by newer technology?
Regulatory soundness: Does the FinTech solution meet both industry and bank security standards? Banks must strive not to risk customer trust; In a poll this year, 70.3 percent of retail bankers ranked it their No. 1 advantage over new startups.
Company soundness: Because many FinTechs are so new, banks should closely scrutinize their profit and loss statements, capital structure, clients and goals. Are the founders in it for the long haul, or looking for a quick profit before moving on?
Cultural fit: Will bank and FinTech executives be able to work together effectively, or will there be serious cultural and philosophical clashes?
Read how Magenic can technologically smooth the way in partnerships between FinTechs and traditional banks in our white paper, "Banks and FinTechs Teaming for Success."