Bank-Fintech Partnerships: What Are the Benefits?
Banks have become successful in creating partnerships with fintech companies. They have entered into various levels of collaboration with different types of fintech companies. But what factors are behind this trend? Are there benefits for fintech startups, traditional banks, and neobanks considering collaborating? In this article, we answer the most relevant questions surrounding bank-fintech partnerships.
Types of Partnerships Between Banks and Fintech Companies–Aims and Benefits
In a 2021 study by the Federal Reserve System (the central bank) of the United States of America, different types of bank-fintech partnerships were outlined. They are operational technology, customer-oriented, and front-end fintech partnerships.
Operational technology partnerships
This is the most common type of bank-fintech partnership. When banks enter into operational technology collaborations with fintech companies, the aim is usually to improve their internal activities and business processes by relying on the technical infrastructure of their digitally advanced partners. Other objectives for this partnership can include fraud monitoring and regulatory compliance.
Customer-centric or customer-oriented partnerships are created to improve the experiences of buyers and users of the products and services provided by the parties to the contract. For example, this kind of partnership can focus on improving the process a prospective customer follows when registering an account with the bank.
Front-end fintech partnerships
This is the least common type of bank-fintech partnership. However, it is growing rapidly in some of the best jurisdictions for fintech startups. In a front-end fintech partnership, the purpose is usually to enable the financial technology company to use the infrastructure of the bank to provide what is known as banking-as-a-service (BaaS) to its customers. It is through such partnerships that fintech firms are able to offer checking and savings accounts, a variety of debit and credit cards, and several other financial products and services traditionally linked with banks.
What Are the Factors Behind Bank-Fintech Partnerships?
The factors responsible for the high rate of partnerships between banks and fintech companies are outlined below.
Increasing use of smartphones
A recent report on Research Square revealed that the adoption of smartphones increased during the COVID-19 pandemic as many people used them to stay socially connected. This trend has continued since then, increasing the demand for mobile-based banking products and services. The situation pushed banks to leverage partnerships with fintech companies to provide innovative solutions that meet the needs of modern consumers, thereby speeding up the digital transformation in banking.
The shift to remote work
Aside from the increasing use of mobile phones, the COVID-19 pandemic also forced businesses in different industries to adopt remote work formats. Lockdowns and social distancing rules created the need for work to continue without physical contact. Hence, many traditional banks had to partner with fintech companies to find innovative ways to collaborate with their teams, manage workflows, and serve their customers remotely.
Need for more technologically advanced solutions
Banks and fintech companies have varying abilities to acquire and use advanced technology—the latter is more innovative and specialised. Besides, through partnerships, fintech giants like N26 and Capital One have shown millions of people that banking can move from just mobile payments to online-only for all services. Therefore, banks that need to upgrade their systems and gain competitive edges over their rivals choose partnerships with fintech firms as a way to incorporate new infrastructure. Thus, they are able to re-establish a solid position in the market.
Demand for higher-level financial security
Fintech companies use online-based systems that are often the targets of cybercriminals. Consequently, they have continued to develop new and innovative solutions for the security of digital wallets, exchanges, and different online accounts. So, banks collaborate with fintech companies to use technologies like two-factor authentication (2FA), 3D Secure, tokenization, artificial intelligence (AI) and machine learning (ML), for services such as app security, automatic fraud detection, and identity protection.
Examples of Partnerships Between Banks and Fintech Companies?
Fintech giants like Mastercard and Visa have so many partners among banks, credit unions, payment service providers, and various financial institutions worldwide. This explains why and how their physical and virtual payment cards are branded and issued to the public in the names of other companies.
Aside from the cases of Visa and Mastercard, below are some other noteworthy examples of partnerships between banks and fintech companies.
Globus Bank partners with Paysera for fast cash pickup in Ukraine
In 2021, the National Bank of Ukraine accredited Lithuanian fintech Paysera and permitted it to partner with local banks in the country. Based on that right, Paysera signed a partnership agreement with Globus Bank to enable faster international money transfers to and from Ukraine in hryvnias, euros, US dollars, and many other currencies. Through this collaboration, the bank and its network of financial partners provide about 150 outlets for local residents to pick up cash from abroad.
Stripe partners with Evolve Bank & Trust to offer banking-as-a-service
Stripe is a big name in the fintech space thanks to its innovative tools and financial infrastructure for all kinds of businesses to manage payments. Its success lies in its partnerships with many banks. For example, the Stripe Treasury, which is its banking-as-a-service product, runs through its partnerships with some major banks in the United States, which include Evolve Bank & Trust and Goldman Sachs.
Revolut partners with Cross River Bank to offer low-cost personal loans
In April 2022, Cross River Bank entered into a partnership with UK-based fintech and global financial super app Revolut to provide personal loans and scale the business of fintech in the United States. The bank opened its regulatory infrastructure and one-stop-shop credit technology to Revolut so its customers can easily use the app to take out loans with no late fees or penalties.
Starling Bank partners with FreeAgent to provide cash flow and accounting tools
FreeAgent is a Scotland-based fintech company that provides money management and online accounting software for freelancers and small businesses. To enable the business banking customers of Starling Bank to access FreeAgent’s cloud-based accounting solution inside the neobank’s app, both parties signed a partnership agreement in April 2019. Thus, Starling Bank’s customers now access FreeAgent’s accounting tools for managing cash flow, tax returns, and invoices, among other functions.
Bank of America partners with PayPal to enhance customer experience
In March 2018, Bank of America signed a partnership with PayPal to allow its customers to use its mobile banking app to seamlessly add many debit and credit cards to their PayPal accounts. Through the collaboration, customers of Bank of America are now able to use PayPal’s features to easily shop online, in-app, and in-store. Also, users of the mobile apps of both parties can now perform simple linking of accounts and enjoy enhanced security and convenience using tokenization technology, modern data analytics tools, and AI-based fraud prevention systems.
Notable Trends in Bank-Fintech Partnerships
In the global financial services industry, there have been some common patterns for creating bank-fintech partnerships. Here is our outline of the notable trends, which include collaborations for open banking, BaaS, and increased security.
Growth of open banking and banking-as-a-service platforms
Many bank-fintech collaborations aim to promote open banking and the provision of BaaS to millions of people. In this regard, banks use API-based technologies to support fintech companies. We described this in our example of the partnership between Stripe and some banks—Evolve Bank & Trust, Goldman Sachs, and others.
Enhancement of digital security
Customers and regulatory agencies have raised concerns regarding privacy, security, and fraud following the promotion of open banking. Hence, the storage of financial data is now being explored by banks and fintech companies. Some financial service providers are enhancing their security systems and creating teams for cybersecurity, which are mostly made up of security engineers.
Development of blockchain and decentralised finance (DeFi)
Blockchain technologies and decentralised finance (DeFi) are being pushed to a global scale through bank-fintech partnerships in the banking, insurance, and other financial services sectors. The development of NFTs and blockchain platforms is all connected to this growing trend. Customers and other stakeholders are looking into how investing in NFTs works. Meanwhile, there are already several providers of innovative products like crypto savings accounts, crypto loans without collateral, and crypto debit and credit cards that allow people to save and spend on cryptocurrencies.
Sustainability projects development
One of the most recent trends in collaborations for financial innovation is sustainability projects. Here, the focus of banks and fintech companies is on environmental responsibility, which includes social responsibility. Green or eco-friendly goods and services are increasingly being offered by several traditional banks and neobanks through partnerships with fintech companies.
When banks partner with fintech companies, they can provide better products, innovative services, and enhanced security to their customers. It helps ensure long-term growth.
Financial technology impacts the banking industry by opening new opportunities for investment, product development, customer service improvement, risk management, fraud prevention, and work process efficiency.
Fintech has completely changed how people perform transactions and the ways companies process payments. Most transactions are now performed online using digital banking or mobile banking apps. With the growth of neobanks and challenger banks, fintech is quickly removing the need for people to physically visit banks. It seems like the future of banking will be all about AI-based online platforms and smart apps rather than brick-and-mortar financial institutions.
Traditional banks that refuse to take strategic steps to innovate or collaborate with fintech companies for support are most likely to lose many of their customers. They could face eroding profits and an inability to manage high operating costs.
Through observing the ways of fintech companies or partnering with them, banks can learn to be more flexible and user-minded in their attitude towards customer service provision and transaction security.
Given the financial technology landscape's ongoing digital transformation, a bank's capacity to efficiently serve the demands of its customers will be greatly influenced by its access to and understanding of fintech systems.
Financial players need to continue to work to expand and engage their customer bases better. It will help them generate more money using cutting-edge techniques.
Finally, partnerships between banks and fintech firms will undoubtedly continue to be a driving force of innovation in the years to come.