Post-fad, partnerships between fintech and traditional financial institutions remain valuable—and viable. Banking is well-known for its slow adoption rate and cumbersome risk management policies. By combining this mentality with that of the startup innovation to such a lethargic sector, fintech has disrupted the financial industry in a big way. Just because fintech is more agile than FIs, however, doesn't mean it's been a clear road.
Financial institutions in the battle to become the "bank of the future" will need to understand the emerging fintech innovations and how they will affect their customers. Daily life will continue to be disrupted, including how customers shop, bank, take in messaging, and make decisions. Fintech also has the potential to increase efficiency, reduce costs, and enhance customer experience. Consider the possibilities of even a small subset of financial technologies.
In its broadest sense, AI tries to mimic human thought. One of the many practical applications of AI is machine learning, or the ability of a computer program to teach itself. Finance implements machine learning in such roles as approving loans, managing assets, fraud detection, and assessing risks. Its future looks bright for:
- Customer service – the development of chatbot "assistants" who can answer voiced questions such as, "How much did I spend on restaurants last year?" and "What was the balance of my interest savings for last month?".
- Security – usernames, passwords, and security questions will likely move over to make way for facial or voice recognition or other biometrics such as fingerprints.
- Product recommendations – just as your favorite online retailer may recommend additional items for you to consider, financial institutions might do the same with financial products or services.
The Internet of Things (IoT)
As more and more "things" connect via the internet, financial institutions can become more involved in the daily lives of their customers to both better segment them and find ways to serve them. If, for example, your customer's smart refrigerator knows she's low on eggs and orders some for her (machine learning), isn't it to your advantage to have that purchase transact through your bank's app, potentially with loyalty rewards pinned to it? This act alone would give you additional market data enough to help further build your customer personas.
Application Program Interface (API)
With the adaptation of Payment Services Directive Two (PSD2), APIs will now play a vital role in the new Open Banking reality. Moving forward, financial institutions need strong, committed partnerships in the digital finance ecosystem—and the incentives are there. The right partners will improve efficiency, give detailed marketing data, and lead new customers to their (virtual) doors. The real benefits of APIs to financial institutions continue to come to light. Starting in 2016, PNC has held competitions among employees to create ideas for customer-facing APIs. Finalists' concepts included mobile geolocation to detect fraud, hands-free banking, and instant mobile bill pay. The winning design in 2016 was a card-free ATM solution, which PNC helped place into development. To quote a cliché: The sky is still the limit for fintech.
Know your competition. Traditionally, this was banks, credit unions, or other financial institutions. But modern FI competition is increasingly tech giants and innovative financial technology startups that have the critical ingredients needed to pinch away at your customer base. Think: Digital savviness, loyal customers, frictionless user experiences, and the flexibility and scope to extend their brands into banking.
The threat from non-traditional sources is significant, with 88 percent of legacy banking companies believing their business is at risk. The good news is that disruptive fintech companies and established financial institutions have begun to start partnering together. Don't see the appeal?
Advantages for Fintech
For fintech companies, cooperation means access to capital and users. Even most customer-focused experience directed at the perfect audience doesn't mean much if the application isn't scalable or lacks the money needed to reach would-be users. Having the help of an established banking organization with an already eager customer base is a home run.
Advantages for Financial Institutions
Despite efforts to develop personalized digital solutions to meet the growing demand from consumers, financial institutions still struggle with offering meaningful experiences. With a world pushing hard and fast to not just digital, but mobile, traditional banks and credit unions are still primarily centered around the brick-and-mortar branch.
Fintech could either erode or aid their customer base with smooth transactions for:
- Fund transfers
- Personal finance
- Loans Insurance
- Wealth management
Partnering with (or buying up) fintech alleviates some of the issues around converting new users and meeting the growing digital expectations of existing customers.
Additionally, financial institutions can work with multiple partners, freeing themselves from relying too heavily on any one business, or inventing everything in-house. This will only become more relevant as the financial technology sector delves deeper into emerging technologies such as developing voice-activated personal assistants (machine learning) or blockchain technologies to reduce fraud risk and automate financial processes.
Fintech companies are not the sole source of innovation. Financial institutions wishing to stay ahead of the curve will need to consider e-retailers and social media platforms in their plans as well. In a reality where consumers view companies like Amazon and Facebook to be as reliable as legacy banks, the opportunities for partnership are limited only by the imagination.