Why Banks Must Work In Harmony With Fintech Startups

May 9, 2017

11:20 am

Fintech was created to rattle the legacy industry that is banking. From lending and investing to deposits and customer service, fintech companies are built with an agile infrastructure designed to reinvent the financial system. These companies can operate quickly and efficiently, something banks have struggled to do in the digital era.

However, big banks are resilient. The big players have survived numerous disruptions, most recently the invention of the internet and the dot-com boom. At the end of 2015, the US banking system had $15.967 trillion in assets. It supports the world’s largest economy with the greatest diversity in banking institutions and concentration of private credit. For comparison, VB Profiles found the fintech industry to be worth just $870 billion in current value.

As more startups emerge and veteran fintech firms become more sophisticated, the conflict between fintech and traditional banking grows.

Advantages of Banks

Banks have a vast rolodex of loyal customers, while fintech offers convenience and efficiency, both of which are required to enjoy success in the finance world.

“Instead of continuing to build a divide, fintech and banks must leverage their strengths and work to collaborate, creating an infrastructure that is advantageous for consumers,” said Patrick Koeck, COO of Creamfinance, an online finance company.

Brick-and-mortar banks may seem old school, but they are far from obsolete. Banks like JP Morgan Chase and Wells Fargo are some of the biggest financial institutions in the world and are staples of the economy. Wells Fargo, for example, has nearly 9,000 branches and over 13,000 ATMs across the country.

Banks are deeply rooted in our economy; they hold a monopoly on credit issuance and are a primary repository for deposits. Even more uniquely, banks are trusted by consumers at a level fintech companies are aiming for.

Advantages of FinTech

Given the propensity of consumers to demand ease of use, convenience, and 24-7 access, the growth of the fintech market should come as no surprise. According to McKinsey, nearly $23 billion of venture capital and growth equity has been deployed to fintech companies over the past five years, and this number is growing quickly: $12.2 billion was deployed in 2014 alone.

Fintech companies came to fruition to fill the void and serve the financially disadvantaged. Now, younger, more digitally savvy consumers demand such services that are personalized, emphasize seamless, or on-demand access to an added layer of service separate from the underlying platform.

And it doesn’t stop with person-to-person payments or online banking. Augmented reality, virtual chats, and big data are all going to be crucial when it comes to communicating with customers.

The Blended Financial Economy

The challenge for fintech startups and big bank incumbents is whether to continue to work in silos or consolidate their strengths for near term and long term prosperity.

“Fintech companies have garnered a reputation for trying to unbundle the traditional banking infrastructure, but that is not always the case,” says Koeck. “Due to the better and speedier access to data Fintech companies happen to be more nimble. Smart data provides us with up-to-date knowledge about our consumers, and therefore we’re able to react quickly to their expectations. By pairing modern analytics with traditional banking, we have the potential to advance the global economy.”

While it is unlikely that fintech companies will capture all financial services, such as person-to-person payments, international transfers, money management, etc., it is undeniable that they can offer traditional banking an array of valuable partnership opportunities.

“The speed of financial technological innovation means that big companies and banks have to collaborate with entrepreneurs and academics to keep up with the pace of change,” said Katherine Manuel, SVP of Innovation at Thomson Reuters. “At the same time, startups and academics need the business input to scale, fund and provide relevance in highly regulated markets.”

Read more about fintech growth here on Tech.Co

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Vikas Agrawal is a start-up Investor & co-founder of the Infographic design agency Infobrandz that offers creative and premium visual content solutions to medium to large companies. Content created by Infobrandz are loved, shared & can be found all over the internet on high authority platforms like HuffingtonPost, Businessinsider, Forbes , & EliteDaily.