It seems 2019 has been a big year for digital transformations. Finextra’s report ‘The Future of Payments’ says legacy-era banking bricks-and-mortar giants have dramatically shifted their operating models in line with the Fintech led technology revolution.
Collaboration and partnership building is overwhelmingly identified as the preferred route to achieving this transformation. Finextra’s biggest finding is that 81% of banking executives would willingly seek a partner to collaborate with in order to achieve their goals of modernising their technology.
Those same banking executives were asked this question and the overwhelming response (55%) said it meant fully changing an institution’s fabric. Others said digital transformation meant offering more innovative products while reducing costs (20%), replacing and renewing the core banking operating system (13%), and offering digital channels such as mobile (12%).
Consumer demand has forced banks and other financial institutions to level up and introduce new products and services that leverage emerging technologies such as automation, blockchain, machine learning and artificial intelligence - all in the name of empowering the customer with greater choice.
Business Insider says these collaborations show how the rise of digital banking may not need to be an all-out competition between traditional financial institutions and fintech startups. In fact, Lloyds found in a recent Financial Institutions Sentiment Survey that 48% of financial services said they have either completed acquisition deals for fintech firms, or have taken a minority or majority stake in them.
Ashwin Shirvaikar, managing director of payments & IT services companies at Citi, points out that the surge of partnerships “is not a temporary shift. It’s a continuation of a process that started many years ago.
“The current consolidation process has been driven by a few points, namely, scalability, costs and innovation of customer experience. Of the companies involved in the three largest deals this year, their existing form was already a result of M&A themselves.”
Ed Molyneux, founder and CEO of accounting technology platform, FreeAgent, says: “It’s always been the case that the large corporates have turned to smaller partners to help them innovate. This is the classic pattern of potential disruption in every industry where the incumbents are trying to get innovation, before the disruptors get distribution.
“It just so happens that the pace of innovation in financial services has accelerated so much in the last five years that there are now companies doing innovative things in start-ups that are built in a way that wouldn't really have been possible 5 or 10 years ago… I think it's a very natural response that the large corporations and banks are finding ways to bring innovation into their world - beyond what’s possible within existing structures.”
There will always be concerns, and many executives have highlighted financial institutions’ suitability for partnering up with the fintech sector. They cite organisational complexity, size, operational concerns (eg integration), and corporate culture clashes as major pain points, but this doesn’t appear to be dampening the appetite for partnering up.
Fintechs and existing ‘bricks-and-mortars’ have drastically different approaches to their business, with can be both a good and bad thing for partnerships. While fintechs thrive in a fast-paced, agile, innovative world of new technology, large institutions tend to have more rigid structures that slow the pace of change.
This contrast means the fintech sector has a lot to offer in terms of speed, expertise and data management, but it can also cause frustration, meaning that while partnerships may indeed help accelerate the digital transformation of major institutions, the journey needs careful mapping.
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