The rise in strategic partnerships – traditional banks and FinTechs
Brian Brodie is Group Chief Executive at Freedom Finance with 37 years of experience in the personal finance industry.
Technology has the power to increase transparency and efficiency, reduce cost, and give historically underserved groups access to better financial options. Society and businesses both stand to gain from technological advances, and incumbents have found themselves challenged by the new wave of digital innovation.
FinTechs have a new way of approaching the financial industry, uninhibited by traditional operations and processes, making them more efficient than their counterparts. Often, they will have the most up to date technologies to gather customer and market insights. This allows them to successfully break through the traditional finance market because they understand what their customers value – and equally care less about – and have the dexterity to deliver new features quickly within an engaging user experience (UX).
Transparent and competitive pricing is just one way these newer players win and retain vast numbers of customers. The fact that many are digital only platforms drives speed of adoption and the ability to expand into new geographical markets quickly. Revolut is one example of a company leveraging these advantages to great effect, expanding into all the EEA countries, Switzerland, Canada, Singapore, the US and Australia.
Traditional banks are increasingly looking to mimic the formulas used by the FinTechs – but as adjacencies to their core business, rather than reforming their legacy brand propositions; for example, Bo, RBS’s challenger bank brand.
Also becoming more commonplace are partnerships between traditional banks and smaller, specialist FinTechs. This is because Open Banking and PSD2 standards have led to the creation of new technologies that allow third parties to safely and securely access customers’ current account data at their request. This means there’s a big opportunity for more FinTechs to plug into traditional banks and build new services that are useful for customers. Take for instance Freedom Finance’s recent partnership with The Co-operative Bank, using our technology, the bank can offer tailored lending options to a broader market.
FinTech companies tend to concentrate on small improvements that, over the long-term, can drive industry wide changes. For instance, solutions for customers unable to get loans with no or poor credit scores. Therefore, these partnerships have a huge value as they allow incumbents to potentially service more customers. By harnessing talent which isn’t on their payroll, traditional banks can utilise and onboard technologies that would otherwise take months to develop. Thus, giving them greater ability to understand and personalise their proposition – leading to fewer abrupt endings for perennially underserved groups.
Securing future success
To remain competitive in this market, banks need to enhance what they have available to them. They must take stock of their strengths and outsource where appropriate. Of course, incumbent banks can build it but, if a FinTech already has it, it makes sense to use this to their advantage. Success will, therefore, very much rely on smart partnerships.
We see a significant number of customers starting their Freedom Finance journey having already been declined by a bank, but then go on to secure a loan that’s affordable and right for them – simply because the bank wasn’t able to accurately interpret their capacity to borrow. These customers tend to fall into some pretty well-defined segments: the young, those establishing themselves in the UK, the self-employed and people recovering their financial stability after an event or income shock.
While traditional banking decision systems may be large enough to securely process millions of transactions, they can be quite ‘one size fits all’ and turn away customers who don’t necessarily meet their stringent and often limiting criteria.
The banks that manage to address this will stand a better chance of long-term success. The modern finance market is crowded with options and choice, and customers often lack sufficient support and guidance. Successful banks will not only pursue strategic partnerships but, will adopt the right blend of technology and human support to make customer’s important decisions easier and clearer.