Fintechs: Disruptors or Partners?

How financial institutions view fintechs can make all the difference

People want help managing their finances and improving their financial health, and they're increasingly willing to look beyond their financial institutions to find that help. In the race to acquire consumers and data, fintechs are meeting consumers' changing expectations by filling voids in digital services and money management.

Taking the right approach to fintechs can enhance your organization's position with consumers – or diminish your relationships before they even begin. By understanding the fintech marketplace and recognizing how to align it with your organization, you can find an approach that fits your strategic objectives and enables you to win for your consumers.

A Growing Comfort With Technology Providers

While that may be worrisome for your organization, financial institutions still hold a significant advantage. Consumers have high expectations, but their highest level of trust still resides with their financial institution. According to the Chicago Booth Kellogg School Financial Trust Index, consumers trust their traditional bank or credit union, in most cases, by greater than 30 percent compared to other options.

Consumers want, expect and often prefer digital advancements that come from their financial institutions. However, if their bank or credit union doesn't offer the advancements consumers want, they're often willing to seek out other solutions.

An Evolving Market

Should your organization view the fintech opportunity as a benefit or a threat? Or should you simply ignore it? The first step in answering those questions for your organization is understanding how the space has evolved, including the vertical alignment for financial services capabilities in fintech.

Over the past decade, financial Institutions and traditional providers have concentrated most of their efforts on digitization of core functions, including account opening, mobile deposit and person-to-person payments. As consumers grew more comfortable with digital banking, the mindset around financial security and data began to shift, signaling to the technology sector that consumers were ready for more digital banking services and functionality.

Changing consumer sentiments and infrastructure improvements have enabled technology companies to make headway in the highly coveted financial services industry. Technology players are able to leverage their expertise in artificial intelligence (AI), machine learning, automation and data aggregation to provide new capabilities typically not offered by traditional financial institutions. Using open APIs and flexible technology platforms, financial institutions are able to partner with fintechs to create differentiated experiences.

Four product verticals have emerged within financial services. Some fintech offerings directly compete with traditional financial institutions. But most fintechs have focused their expertise on developing a new subset of services, such as financial management and automation, robo-investing, and fraud and security, that can enhance consumers' digital banking experience.

1. AI and Data: Technology partners have extended their expertise within machine learning, data modeling and predictive analytics. Focusing on financial data and AI services allows startups to build solutions that leverage existing financial institution core systems. Those capabilities use existing infrastructure, pulling in user data to make sense of it in a new way. That enables fintechs to create solutions that power products such as voice banking, virtual assistants, financial insights, chat bots, intelligent engagement and prediction modeling.

2. Automation Services: This vertical focuses on leveraging existing consumer data to provide financial education and insights for end users. The trend toward financial transparency and money management solutions created a subset of tools that automate financial decision making for the consumer based on several back-end data inputs and transactional data points. Those solutions also focus on automated savings and budgeting, money movement tools, investing and back-office efficiency.

3. Online Lending: Online lending has experienced explosive growth in recent years as fintechs took advantage of changing regulations and access to consumer financial data. Leveraging their expertise in AI and data, fintechs have removed traditional friction points in decision making and onboarding processes, adding value by providing consumers with a faster, more convenient service with greater transparency. A subset of technology services and capabilities have emerged that support the digital lending process, including credit score and risk assessments, identity verification and digital acquisition.

4. Digital-Only Experiences: Fintechs often provide solutions focused on the digital-only user, adding value by simplifying typically complicated transactions and banking functions. Leveraging analytics and technology, fintechs can improve the user experience and engagement model, especially as many consumers move away from in-branch engagement with financial institutions. Digital-only banks continue to pop up and larger financial institutions are creating beta banks to explore and collect data around this new way of banking.

What's the Right Next Step?

Most consumers still employ a patchwork of apps to address those four verticals. As a result, many financial institutions are wondering if partnering with fintechs is the right next step.

There is great potential in the marketplace and much to investigate. Where do you begin? Employing a holistic approach and working toward organizational alignment will help. Here are some considerations:

    Customer Relationships:

• Has your organization developed customer experience journeys and use cases? Have you identified what issue you are trying to solve or the opportunity within the customer journey you can enhance?
• How can a fintech partnership strengthen your position as the primary relationship owner?

    Strategic Objective Alignment:

• Are there clearly defined product division and enterprise objectives that a potential partnership can be aligned to?
• Can you grow together, or will a new partner be just another vendor?

    Technology Integration and Compatibility:

• Have you identified supporting sponsors from both business and technology organizations?
• Does your organization have a technology compatibility matrix?

    Vendor and Risk Management:

• When will a security risk assessment and due diligence evaluation be conducted?
• How will sensitive information and data be managed, and who will own it?

Meeting Consumers' High Expectations

It's a new world, and consumers expect their financial institutions to bring the latest fintech advancements to the table. According to PwC, digital is the top consideration for consumers when determining where to bank, open accounts and manage their money, whether it's a traditional financial institution or fintech.

But succeeding in this environment is no longer about transactional features, functions and capabilities. It's about building relationships and experiences that help consumers quickly and easily manage their finances and become financially healthy.