Many incumbent bank and payment service providers have been caught out by the speed with which FinTech start-ups have been able to eat into their revenue streams. Unable to compete on price or flexibility, these established institutions have only one key advantage – a healthy customer base that far outstrips that of any new entrant.
To address this problem, many banks and payment service providers have taken to partnering with FinTech’s. Banks supply industry knowledge, funding and customers in return for access to technology and services.
But, with the FinTech ecosystem so disaggregated, how does a bank go about choosing the right FinTech partner?
There are platforms available that provide virtually every financial service imaginable, but many won’t suit your firm’s needs. Even if the technology is a good match, there needs to be a deeper alignment down to business goals and objectives. The FinTech industry succeeds because it is constantly evolving. This means that the services offered today are likely to change significantly over the course of the next 5 years. This is why there is an emphasis on choosing a partner who shares the same goals and objectives as your business.
Worse still, if the FinTech provider’s goals are significantly different to your own, their product development will likely be focused on new services and tools that are actively pulling away from yours. Their platform will only be of use for a limited time before you need to restart the process of assessing potential partners, looking for a replacement - a costly and time consuming exercise.
Partnering with the right FinTech provider will avoid such frustrations. Shared goals are a good indication that you are working on a long-term partnership that will serve you both. You are also far less likely to encounter problems with obsolescence or service termination as both parties grow and succeed together.
One of the many reasons for the explosive success of the current crop of FinTech companies has been that they are not burdened by the the same levels of regulation as their established counterparts. Without the red tape, FinTech organizations have been able to grow almost unimpeded - so far!
The more it grows, the more the FinTech sector will come under scrutiny from regulators. All Payment Service Providers (PSPs) are already bound by PCI DSS regulations for instance, and legislators world-wide are considering how to adjust existing frameworks to encompass new technology-driven services.
Perhaps ironically in the face of how FinTech firms have flourished without it, 59% of global financial services executives working at established firms believe that regulation has enabled them to grow. Consequently, regulatory experience is yet another factor in which established banks have the upper hand, giving them additional leverage in a partnership.
However, it is absolutely vital for established banks to ensure that their partners are fully compliant with the prevailing regulations. Failure to do so, they risk sanction and fines for any points at which their service (including those being processed by a partner) fail to meet the required standards.
In order to strengthen any partnership, and ensure regulatory compliance at every stage of your transactions, transparency is crucial. To avoid any suspicion of impropriety, or the risk of extended, costly regulatory investigations, you and your chosen FinTech service provider will need to be able to clearly document every stage of every transaction.
The move to enhanced information sharing and availability will also prove crucial as you look to extract new insights from the data generated by your customers. The FinTech revolution is being sustained by the ability to aggregate and analyse transaction data and the metadata surrounding each. The use of smartphones for consumer-based financial activities allows service providers to better understand their customers and develop new products and services designed around their preferences and real-world needs.
If a prospective partner is unable to provider the necessary transparency – at any point – the relationship is likely to cause more problems than it solves. Instead, you must be certain that your businesses can work together, sharing information appropriately, to meet regulatory standards and to better serve your customers.
At the same time as your business (and regulators) are calling for increased transparency, customers are increasingly disinterested in the mechanisms that underpin financial services. The ease with which a transaction can be completed successfully, is their greatest concern. Take Peer-to-Peer (P2P) currency conversion for example; your customer wants to know that they can put £500 GBP into the system and receive an agreed amount at the other end. They do not really care what happens behind the scenes.
When choosing a FinTech partner, it is vital that your technologies interface neatly to assist with efficient data transfer; everything needs to be focused on delivering a seamless experience for your customers. This will require a good technical understanding on both sides, collaborating to build the necessary APIs and technologies to assist. Without the technical know-how, your partnership will be dead in the water.
The rigid nature of established banks and payment processing providers means that they are not structured to compete equally with more agile FinTech providers. Rather than yield key portions of your portfolio to FinTech providers, partnerships offer a way to benefit from advanced technology and give customers the flexible financial services they demand.
To conclude, selecting a FinTech partner is one of the most important decisions for many companies today, with huge ramification in the future if they choose incorrectly. Many organizations make the mistake of opting for one which yields obvious, short-term pay-offs. Whilst such a choice might pay off initially, this is a mistake which can cost valuable time, expense and most importantly opportunity as the chance to gain competitive advantage within the market is lost.