Embracing change in the midst of digital transformation: How banks and tech companies can collaborate more effectively

Dieter Halfar, Partner at  Elixirr

Traditional banks have significantly increased their investments in AI, with 40% of all open job roles now related to artificial intelligence. Recent research by The Economist further highlights this adoption, with AI bolstering the customer experience, predicting risk and enhancing investor services.

However, while banks are actively adopting AI, they’re finding themselves on the back foot due to the sheer speed of innovation and complex regulatory landscape. As a result, processes remain largely unchanged which risk denting customer loyalty and stifling coveted new revenue streams. In contrast, the agility of fintechs and tech companies, fueled by their inherently digital nature, can quickly develop value-added services and innovate operational processes. 

In this rapidly evolving financial landscape, greater collaboration between banks and fintechs is a strategic imperative that will propel operational efficiency, streamline processes and slash costs. By working collaboratively, both can succeed in delivering exceptional customer experiences.

Building on fintechs’ “Lego-like” structure

The digital disruption that fintechs and tech companies bring has forced traditional banks to reassess their strategies and embark on their own digital transformation. It’s no longer sufficient for banks to simply compare themselves against their peers. To truly excel, banks must look beyond this and benchmark themselves against technology firms while outsourcing providers to determine what ‘good’ looks like.

By leveraging a “Lego-like” approach to their foundational structure, fintechs are in a better position to pivot quickly and scale effectively in response to evolving consumer needs. While this is an approach that large banks would struggle to leverage internally, entrusting fintech partners to drive specific processes such as risk enables banks to benefit from the agility that fintechs provide. Knowing when to retain certain services in-house and outsource to trusted third parties will enable banks to deliver excellent customer service.

For example, MUFG’s decision to outsource its custodian provider to leverage Citi’s technology capabilities and sub-custodian network is a testament to the value created through collaboration, not just to businesses, but to their audiences and customers as well.

Embracing disruptors to navigate challenges

Contrary to popular belief, partnerships are not synonymous with a loss of control. Instead, they represent a strategic move for both traditional banks and fintechs to pool their strengths and navigate challenges more effectively. This creates a pathway for traditional banks to keep up with fintechs and share their strengths, especially when it comes to security.

However, it’s important to outline clear guidelines so both parties retain a sense of control. Establishing clear service level agreements (SLAs), robust escalation paths and transparent handshakes, alongside stringent quality controls and routine evaluations, is vital for fostering a strong relationship. Regularly evaluating the commercial viability of the agreement and ensuring that thorough business continuity plans remain in place will help set the partnership up for success.

Unlocking new revenue streams 

Against a backdrop of economic uncertainty, market volatility and geopolitical tensions, continuing to diversify product offerings and identify new revenue streams is key for banks. Providing third-party services, untethered from market sentiment can be a game changer but requires a robust partnership.

By partnering with third-party tech companies, banks are in a better position to ensure their services are supported by predominantly automated processes and scalable technology. This in turn helps to keep the internal cost base low while opening new revenue streams. What’s more, by leaning on tech providers, banks can dedicate more time to bolstering their level of governance and enhancing regulatory compliance, while navigating potential barriers, heightened risk appetite and related processes.

Looking ahead

The banking sector is undergoing a transformative shift driven by tech and fintech disruptors. By acknowledging that not everything can be done in-house and benchmarking against disruptive tech firms instead of competitors, banks will not only unlock potential new revenue streams but reinforce existing customer loyalty. To foster strong collaboration, banking execs need to let go of concerns around control and adopt a more entrepreneurial mindset that allows them to consistently evaluate and maintain commercial viability while prioritising client-centricity.

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