On Fintechs & Banks: Some Things Are Just Meant To Be
Just a few weeks ago, over 4,500 companies and 11,000 attendees made their way to Vegas in hopes to learn, share, and strike new partnerships.
Days were filled with debates like cryptocurrency regulations and blockchain technology, as well a startup pitch competition with YayPay being selected in the top 4 finalists!
An interesting announcement came from JPMorgan Chase: the financial giant is joining the ranks of other banks by announcing that they will acquire a Silicon Valley payments-as-a-service API provider, WePay.
So, why are large financial institutions venturing outside of their comfort zone into the land of Fintech startups? Why are they looking to make the change? What’s in it for them?
In the 2016 Global Consumer Banking Survey that involved 55,000 bank customers from 32 countries, Ernst & Young identified the following four areas that banks need to focus on in order to stay relevant:
- Building customer trust
- Enhancing customer understanding
- Rethinking distribution and customer engagement
- Innovating customer experience as fintechs do
The top item on this list comes as no surprise. Since the financial crisis in 2008 and its messy aftermath, bank customer loyalty scores have continued to decline.
Going further down EY’s list, Millennials, the biggest generation in U.S. history, are in their prime spending years… and Gen Z is not too far behind. These generations are very used to the hi-tech, easy-access, high UX/UI-standards, and they are not about to give that up. Now stop and imagine a typical ATM... This doesn’t exactly scream hi-tech.
Traditional banking systems are slow and cost a lot to maintain. In addition, the potential for fraud, both internal and external fraud, is quite high. Maintaining adequate security against fraud costs money and entails instituting processes that are contrary to a great client experience.
Financial technology is changing all the time, and banks need to change with it.
Just think about the way PayPal, for example, has changed the world of online shopping. Before PayPal, if you wanted to buy something online, you had to hand over your credit card information. That meant being sure that the people setting up the site were trustworthy and that their servers were completely secure.
PayPal changed that and made it simpler for merchants and users. It’s the perfect example of how a forward-thinking Fintech company can be a complete game-changer.
Blockchain technology is another great example. Twenty years ago, the idea of distributing information across a network of public computers to make it more secure would have been considered laughable. The first application of blockchain technology, Bitcoin, proved that not only was the system workable but that it was more secure as well.
And, while Bitcoin is just a simple cryptocurrency, the technology behind it is continually evolving and becoming more powerful. Applications of the technology such as Ethereum are rewriting the way the technology is being used – allowing for the creation of Smart Contracts and Decentralized Application, in addition to offering simple cryptocurrency exchanges.
Initially, these systems were considered “flash in the pan” ideas that would never take off. Now they have established a firm foothold and have become industry disruptors.
Why? They were created by forward-thinking fintechs who understood what the market needed. They understood how client needs were evolving. They worked on ways to come up with solutions that were straightforward, faster and more accessible.
But these are only a couple of examples of how fintechs are changing the landscape. The emphasis going forward is on making systems more efficient, accessible, innovative and more secure and fintechs are at the cutting edge of innovation.
So how are traditional banks going to keep up with today’s new technology innovations? The solution: partnering with fintechs. Fintechs speak the language of Millennials and know how to cater to this highly demanding demographic. Getting their attention opens up new revenue streams.
And it’s not just that fintechs understand Millennials so well. They are more responsive to market trends and more easily able to adapt to changing market forces. Through the partnership with fintechs, the banks are able to cut their learning curve significantly.
They are able to offer products that their clients need without needing to devote their time and resources to developing them. They are able to respond faster to changing market needs and so, remain relevant.
Additionally, banks are looking to reestablish and provide solutions for corporate clients that entail more than just lending and deposits. By leveraging fintechs, banks will be able to offer value-add services on top of the corporate treasury offerings.
Chris Chazin, Citigroup’s Director of Emerging Payments & Channels*, mentioned the following to American Banker:
“In some ways, we’re tapping into these partnerships because they are making our organization less comfortable. The expertise [fintechs] bring does create internal conflict that has to be managed, but it requires an ongoing education.”
According to PwC’s Global FinTech Report, over 80% of financial institutions feel the pressure from the FinTech sector.
This pressure fuels a strong desire to partner (and at times acquire) fintechs. An impressive 82% of banks are planning to do just that in the very near future.
So, what do fintechs get in return? As Federal Deposit Insurance Corporation’s survey noted, close to 70% of all US households were "fully banked" in the 2015 year, which means that fintechs get to tap into this huge pool of customers.
Also, Banks are heavily-regulated by Federal Agencies, and even recent turmoils aside, banks still carry a lot of credibility. And that is where fintechs stand to gain the most. With fintechs being new into the industry, the credibility that comes with such a partnership goes a long way. The infrastructural support that the banks bring to the table is also of great advantage to fintechs.
YayPay is a perfect example of such a symbiotic union. We’ve already partnered with Fifth/Third Bank, and we are seeing a very strong interest from a variety of other large financial institutions. Banks are looking to YayPay to help offer their customers efficient receivables forecasts, real-time analytics on what’s happening with their working capital, automated payment communication, and provide a full accounts receivable CRM.
YayPay makes it possible for companies to analyze debtor’s data in an instant. This allows the company to make more informed and accurate decisions when it comes to managing their debtors in future.
Through this partnership, Banks are also looking to minimize churn and increase their customer LTV.
The financial ecosystem is evolving at a very rapid pace. To quote a Fintech Weekly Magazine, “Millennials are more prone to be enthusiastic about wearing and carrying their bank rather than wary of being tracked. . . “
They want you to be more innovative, and responsive to their needs. The banks that can tap into this enthusiasm for innovation are way ahead of the pack. Complete organizational change, however, is difficult to accomplish, especially in an environment where every second counts.
Partnering with the right Fintech is a shortcut to accessing greater market flexibility and offering additional value to your clients. YayPay offers a valuable solution to a very real client issue – the timely and more efficient management of accounts receivable and automation of collections process.
Needless to say, it is an exciting time to be involved with a great Fintech company!