Better Together: Banks and FinTechs

Fabrice Albizzati, Principal, Financial Services Advisory, Strategy & Business Transformation and Andrea Boone, Executive Director, Financial Services Advisory, Digital, Ernst & Young LLP

For at least half a decade, consumers have been rapidly embracing platform-based services for personal transportation, same-day delivery, and access to the digital-sharing economy. The list is long and these platform-based businesses reduce friction and lower pricing while offering better service—not to mention they’re optimized for mobile.

A similar model in banking would remove friction from the customer experience by enabling the customer to manage his or her entire financial life from one application. That includes bank accounts, 401k plans, stock options, and tech services. So far, neither traditional banks nor FinTechs have built such a model, but both are close. If the two camps collaborate, a platform-based banking model is in our near future.

"Banks have what FinTechs don’t and vice versa. Neither camp faces an insurmountable obstacle, but it would be a lot easier on both parties to collaborate"

There’s (already) an app for that

In the last few years, banks have put a ton of resources into evolving their user experience. Most have successfully developed sophisticated mobile apps that enable customers to use their phone or tablet as a “one-stop shop” for their day-to-day financial needs. Some fast-moving banks have even started taking steps toward the platform strategy and building their own platforms. The largest banks are beginning to partner with each other, and some have established FinTech divisions to improve their technology.

At the same time, FinTech companies have introduced not only sophisticated technology solutions, but disruptive business models that eliminate unneeded expenses and optimize customer data. Using the rapid development tools available for mobile app deployment, FinTech companies are able to avoid entire expense categories involved with physical buildings and computing infrastructure, allowing them to market highly functional financial products and services at highly competitive rates.

FinTechs have also capitalized on the ability to compete in areas of strength with the highest profit margins, leaving low-margin, high-cost services, like safe deposit boxes, to the incumbent providers. Moreover, their new offerings are designed to be self-service-oriented. The net result is that technology competitors can challenge banks’ production costs while undercutting them elsewhere in the value chain, which presents an extremely challenging situation for vertically integrated banks.

Banks can embrace FinTech, and vice versa

As these trends accelerate, banks’ fee and margin revenues will see increased risk. Although the traditional banking industry has numerous regulatory and reputational advantages, disruptive innovation will eventually find a way through to the marketplace. Platform-based business models are an opportunity for banks to restructure vertically integrated banking business models to overcome these risks.

Comparing Traditional Banks and Fintech Companies

For traditional banks, remaining competitive will rely on their ability to create instant mobile access to a wide range of diverse products and services. To do so, they have to embrace the platform-based business model, either on a newly created platform of their own, or as an active participant on a FinTech’s platform. As such, banks should be careful not to adopt an us-vs.-them mentality, and instead, seek to collaborate.

What’s in it for FinTechs?

A smart banking platform is a win for both banks and FinTechs. It would allow banks to deliver a unified banking experience, while also establishing standards for third-party FinTechs to build products and services on behalf of bank customers.

This way, banks would own the end-to-end experience of traditional integration points, such as bill pay, leveraging their expertise in security, authentication and compliance. The FinTech companies would contribute their customer-focused technology expertise, saving banks from spending to develop their own.

Thus far, however, the banking industry has yet to see the level of disruption predicted, and if they play their cards right, they never will. Banks have what FinTechs don’t and vice versa. Neither camp faces an insurmountable obstacle, but it would be a lot easier on both parties to collaborate. 

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