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Why are US banks struggling to form partnerships?

By Puja Sharma

May 09, 2022

  • AI
  • API
  • B2B FinTech
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Banking FinTech

Nearly half of banks and credit unions have no personnel dedication to FinTech partnership. Financial institutions committed to growing through FinTech partnerships would benefit from a hybrid approach to partnering. However, only 12% of financial institutions follow a hybrid approach to such partnership.

Several major changes were already occurring in the global banking industry before the COVID-19 pandemic struck in early 2020. US branch footprints shrank by about 20% in the last decade, while Nordic footprints shrank by 60%, as per the McKinsey report. As consumers came to expect more and more from their online banking services, their needs were evolving rapidly. In response, banks digitised their front ends and established next-generation technologies in their middle and back offices to reduce costs and improve service.

The crisis has forced banks to use more innovative methods to deploy talent dynamically and to build future workforces, such as reskilling employees for new jobs, upskilling them for additional skills in their existing positions, and redeploying them to new roles in the organization. During the past year, banks have been reskilling their workforces rapidly and at scale, leveraging the efficiencies available from skills adjacencies (skills from previous roles complementary to those required by new roles). Also, infrastructure is being built to support effective upskilling and redeployment (such as learning factories and job-matching platforms).

Banks are ripe for disruption due to the simplicity of their products and processes for savings, lending, and business services. The majority of financial sector executives (73%) believe consumer banking is most likely to be disrupted by FinTech. There is an opportunity for new entrants to disaggregate traditional banking components and offer targeted solutions with better servicing to both consumers and businesses.

Nearly half of banks and credit unions have no personnel dedication to FinTech partnership. Financial institutions committed to growing through FinTech partnerships would benefit from a hybrid approach to partnering. However, only 12% of financial institutions follow a hybrid approach to FinTech partnership. The IBS intelligence data shows the organisational approach to the FinTech partnership in the US.

Meanwhile, FinTechs have the potential to disrupt four key areas of incumbents’ business – market share, margins, information security/privacy, and customer churn – at a faster pace when compared to other financial sectors.

In comparison with FinTechs, traditional banks are still in the early stages of developing customer-oriented solutions. According to the survey, by PwC on how FinTech is reshaping banking. only 53% of respondents from the banking sector believe they are consumer-centric, compared to more than 80% of respondents from the FinTech sector. By prioritising 24/7 access, FinTechs make their services accessible through non-traditional channels such as social media, empowering customers to a great extent.

Future of collaboration

The core problem of legacy financial institutions is an antiquated technology that is cumbersome to navigate. B2B solutions get to the heart of the issue. Open development and Software-as-a-Service (SaaS) solutions offered by FinTech start-ups are increasingly being used by banks to integrate and streamline operational capabilities and move toward digital/mobile delivery. Application program interfaces (APIs) enable third parties to create value-added solutions and features that can easily be integrated with bank platforms.

New entrants and banks may collaborate directly instead of competing. Both parties should benefit from such an arrangement. Banks can offer distribution and infrastructure capabilities in addition to product design and development capabilities. Several major obstacles prevent banks and FinTechs from doing business together.

From the banks’ point of view, FinTechs lack proper IT security and regulatory certainty, while from the FinTechs’ point of view, banks can be difficult to work with due to differences in management and cultures, as well as different operational processes.

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