> Posted by Vitas Argimon, Credit Suisse Global Citizen Volunteer
This post is part of a multi-post series focused on partnerships between commercial banks and financial technology startups.
Today’s financial sector narrative pits the new guy against the old guy. In the case of financial services, this narrative, as it is often portrayed, places commercial banks, the legacy providers, in direct competition with startups, with both parties vying for customers in a game defined by technological advances. While this narrative sometimes plays out in real life, it leaves out the complex ecosystem of interaction between the old and the new. In fact, when it comes to reaching new customer segments, old players are increasingly turning to startups.
In The Business of Financial Inclusion: Insights from Banks in Emerging Markets, CFI and the Institute of International Finance reveal that commercial banks are partnering with fintech startups in their efforts to reach the unbanked and underbanked. As challenges by tech-enabled competition mount, banks are seeking to link-up with startups as they see opportunities to reach new markets, bring down costs, and/or enhance their service offerings. Startups offer agility, a proclivity for risk-taking, and a disruptive mindset. On the other hand, banks already have the customer scale, comprehensive product portfolio, robust infrastructure, deposit insurance, branding, and experience/expertise. (See a full list of the relative strengths of banks and startups at right.) The combination of these strengths can be especially enabling when seeking out previously unreached population segments because the business models for serving those segments often depend on technologies that bring down costs. Startups can offer banks the tools they need to serve lower-income customers that would be difficult to serve within the confines of their traditional banking models. At the same time, many startups need access to customers and financial resources that banks can provide.
As part of my work as a Credit Suisse Global Citizen Volunteer, I mapped the landscape of partnerships between commercial banks and fintech startups, with a focus on those aimed at expanding services to reach the unbanked. I found four primary areas in which these partnerships are enhancing operations: blockchain and digital payments; lending and credit scoring; KYC and compliance; and financial capability building.
While fintech startups and commercial banks offer great opportunities to each other to improve processes and expand operations, the challenges to forming successful partnerships can sometimes get in the way. The legacy systems that serve as the basis for bank operations remain a big obstacle to effective integration of applications provided by startups. Clunky IT platforms, deeply engrained company processes, and tough or murky regulatory environments make change very difficult and costly.
Partnerships may also present risks to commercial banks. Banks strive to have regulation-proof, air-tight procedures – and may shudder at the quick and dirty approach taken by some startups. One specific area of contention is data. Not surprisingly, banks are very protective of client identifying data, even when working with startups that need the data as part of their business model, for example, when carrying out alternative credit scoring. Banks are wary that startups may be susceptible to hackers and cybercrime. Additionally, banks have a vested interest in keeping client data proprietary for competitive reasons. Partnerships centered on lending present their own set of challenges, including the question of which party (the startup or the bank) is considered the “lender” under law, and, in the case of innovative credit scoring models, concerns surrounding overindebtedness. Synchronizing bank protocols for risk management, may be essential to partnerships with startups.
It is important to remember that even in the face of the risks and challenges listed above, commercial banks are finding a way to partner with fintech startups, and at an increasing rate. As discovered in interviews with 24 banks as part of the Business of Financial Inclusion report, these partnerships are part of complex strategies to reach the unbanked and underbanked. They are challenging the dominant narrative about the battle between old and new, and offering another way to build a more inclusive financial ecosystem.
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