Despite a long tradition of developing their own proprietary platforms to deliver banking services to corporate treasurers, leading banks are increasingly working more closely with fintechs to take advantage of their innovative, digital technologies.
Such partnerships range from white-labelling fintech solutions to delivering modern-day digital services to their corporate customers to investing in fintech start-ups to support the latter’s development of new technologies that they, as banks, can deploy with ease.
According to a recent survey from Economist Impact, commissioned by WSO2, over half (54%) of the 300 C-suite banking executives surveyed said their financial institutions have “faced greater competition over the past three years from digital alternatives” due to tech companies having looser regulatory compliance and an ability to collect more data.
Increased competition has driven banks to collaborate to innovate, with nearly half (48%) of banks surveyed opting to partner with fintech start-ups over the past three years.
It is “no surprise” to see banks and fintechs working much more closely together, says Kirsty Rutter, fintech investment director at Lloyds Banking Group.
“The fintech industry has matured rapidly over the last decade and they are great at imagining the future,” she says, pointing out that there are more than 25,000 fintechs globally, of which 10%are in the UK.
“Fintech companies tend to be led by industry professionals who have stepped out of large corporates to build purpose-led businesses that solve niche banking problems,” says Rutter. “They are doing all of this while also focusing on improving the speed of interactions and the customer experience.”
Rutter says that many leading UK banks are pursuing collaborations with fintechs by setting up both incubator and accelerator hubs for fintech entrepreneurs developing new technologies, which they as banks can then deploy to deliver more innovative, digital solutions to their own customers.
Collaborate to innovate
Lloyds itself set up its own Launch Innovation Programme to offer entrepreneurs the opportunity to run a proof of concept with the bank. Entrepreneurs that succeed in applications to join the scheme are provided the opportunity to refine and test their value propositions; talk to Lloyds senior leadership and market experts; and gain access to support and clinics as well as 12 business masterclasses. The fintechs later pitch their bespoke proposals to the challenge sponsors who head up Lloyds’ various business and change units to secure a partnership with the bank.
Lloyds’ specialist fintech investment team, headed by Rutter, takes minority equity stakes in these early-stage fintechs to bring their solutions to the market.
“We have found that this route enables us, and the fintech teams, to foster strong engagement, maximising the potential to achieve a successful outcome for all parties,” she says. “Our aim is to create as much value for the companies involved, while also maintaining our focus on growing a culture of innovation across the organisation to support us in our broader strategic plans.”.
Rutter believes that collaboration opportunities, fostered by the creation of incubator and accelerator hubs, represent a ‘win-win’ situation for both banks and tech entrepreneurs looking for support in the early stages of their development.
“The fintech entrepreneurs are working alongside subject matter experts who really know their market, and then gaining access to a significant number of UK consumers and companies. Meanwhile, the banks benefit from the focus and energy that fintech companies have in finding new and different ways of working, testing and learning.”
Different fintech experiences
At Moneycorp, a fintech which offers international payments services to corporates, SMEs and individuals, management consultant Anil Sawrup, explains how banks and fintechs are collaborating in different ways to deploy more innovative technologies and solutions.
Moneycorp itself collaborates with banks in its offer of international payment services to end customers and also provides its international payments product suite to banks on a white-labelled basis. The company is also expanding its partnership with banks so to allow them to leverage its tech-enabled API platform to provide a simplified and seamless international payment experience to end-customers.
“From what we see, banks are increasingly recognising and trusting fintechs,” says Sawrup. “They are willing to invest in or work with fintechs – or even have a fintech’s offer customised for themselves to deliver new services to their customers.”
He points out that while B2C financial products and services have become more digitised and mature, B2B financial products and services are still lagging behind.
“Banks are increasingly looking to collaborate with fintechs to replicate the success of B2C financial products and services,” he says.
He explains that fintechs, meanwhile, can also gain from collaborations by taking advantage of the larger institution’s brand awareness and credibility.
“Since many fintechs are start-ups end-customers may not trust their brands and their services because they are unproven and lack reputation, collaborating with banks will help fintechs expand their potential client bases by reaching out to the banks’ client base,” he says.
“Given that investment in fintechs has dropped significantly this year because of the capital market reset, fintechs – especially start-ups – can secure capital flow from banks to help navigate them through this challenging climate,” he continues. “Also collaborating with banks allows fintechs to leverage the expertise of banks in areas such as regulatory compliance and risk management for their ongoing business development.”
He adds that banks’ various collaborations with fintechs in recent years have enabled them to offer their own customers enhanced services such as real-time payments, multi-currency cross-border payments and an innovative approach to lending.
Sawrup concludes that 2023 will see even more collaborations between banks and fintechs.
“Banks are strictly regulated and have less flexibility in innovation. In contrast, fintechs are highly agile and operate without the tight regulation that banks have to adhere to,” he says, noting that the pandemic emphasised the need for banks to digitise their services and the importance of fintechs.
“We see now that most banks are taking the opportunity to collaborate with fintechs to digitalise their products, customer-facing touchpoints and also to improve their employees’ productivity and digital experience.”