Tech-driven efficiency: why fintech partnerships are a lifeline for legacy banks

by Bion Behdin, CRO at First AML

Banks are increasingly looking to fintech partnerships as a way to accelerate innovation and bring new products to market more quickly. Rather than developing these capabilities in-house, they are collaborating with fintech start-ups, scale-ups, and tech providers. By leveraging the cutting-edge technology that fintechs offer, banks can significantly enhance their customer offerings.

In these partnerships, fintechs bring in technological expertise, while banks offer funding and a broad customer base. This synergy enhances the potential of both parties. Banks find established fintechs with successful products particularly appealing. These fintechs provide a lower-risk alternative to costly, time-consuming in-house development, speeding up the go-to-market strategy. That is also why banks want to implement a digital transformation platform like NayaOne’s Digital Sandbox as a key infrastructure to accelerate financial technology partnerships and drive innovation. Ultimately, the relationship breeds efficiency and innovation in the financial sector.

With the rise of challenger banks such as Monzo or Revolut, it’s particularly important for traditional banks to keep pace, especially since the latter has recently notched a $45bn valuation in share sale by its employees. Monzo, too, claimed top spot for the fourth year in a row when it comes to customer satisfaction in the Competition and Markets Authority (CMA) league table.

Clearly, this new wave of challenger banks is not going away anytime soon and their services will only continue to expand with loans and insurance products, capturing the entire life cycle of their client base. This will ultimately cause massive erosion to the balance sheets of the traditional sector.

But the evolution of these bank-fintech partnerships at least shows legacy competition is fighting back. These collaborations have even led to a new term being coined: “co-opetition”— a blend of cooperation and competition. This trend not only optimises operational efficiency but also allows banks to focus more on other value-adding tasks

How tech is aiding banks

Among US banks surveyed by Cornerstone Advisors, the top three domains for partnerships are payment facilitation and money movement, fraud and risk management, and mobile wallet solutions. Notably, 35% of surveyed banks have already collaborated on fraud and risk management, with another 24% planning to do so. This is similar to a theme raised in a First AML survey, which found that 99% of financial services C-suite members plan to change AML processes in 2024, with the majority of them (47%) citing tech investment as the solution.

Fintech partnerships help banks navigate these regulatory challenges efficiently, ensuring quicker market adaptation and supporting their corporate innovation. The customer-centric models and technological insight of fintechs enable traditional banks to meet customer expectations through services like real-time payments, enhanced security features, and user-friendly digital interfaces.

From AI-powered chatbots providing efficient customer service, to SaaS platforms streamlining the anti-money laundering process and boosting efficiency, there usually is a company for everything.

How it plays out

According to Gartner, banks have an average of 9.4 fintech partners. Digital transformation spend aligns with this also, with banks spending $378 million per year on average. In the UK, when asked about top focus areas in 2024, digitalisation ranked highest (26%), closely followed by automation (25.7%).

And the proof is in the pudding. When the Swiss Federal Council announced plans to allow zero-interest loans, UBS partnered with Automation Anywhere to develop robotic process automation for loan processing. This collaboration reduced processing time by about 85%, demonstrating the power of automation in streamlining operations and enhancing service delivery.

These examples underscore why banks are increasingly embracing fintech partnerships. Banks understand the rapid technological changes reshaping the financial world and recognise the need to adapt. Fintech partnerships provide banks with specialised technological capabilities that go beyond their internal expertise, allowing them to offer innovative solutions without the burden of developing them in-house.

What are the potential challenges and how can they be overcome?

Despite their benefits, fintech partnerships are not without challenges. Issues can arise across sourcing, implementation, and management if not planned carefully.

One common pitfall is pursuing partnerships without a clear business purpose or defined metrics. This can lead to a scattershot approach, with resources spread too thin. To counter this, banks and fintechs must have a clear vision of their end goals and ensure that collaboration builds value.

Integrating technology can also encounter common barriers, but these are usually down to a lack of training or misalignment of people, rather than the tech itself. Fintechs must ensure staff are sufficiently confident with these new tools to bring success and banks must supply ample resources throughout the partnership. This, too, applies to missed opportunities by either party to expand the relationship. If partnerships fail to deliver new value as strategic objectives and challenges evolve, they can lose momentum. It’s essential to prioritise continuous value creation.

This is why banks are turning to external Sandboxes as a tool to accelerate fintech partnerships and implementation. Using an external Digital Sandbox means banks can run Proof of Concepts 90% faster and cheaper, getting the right solution to their customers quicker, and avoiding buyer’s remorse or implementation pain.

NayaOne is the leading Digital Sandbox Platform provider to financial services firms and regulators in Europe and the US, including Valley Bank and the UK’s Financial Conduct Authority. Their platform lets technology leaders save time and cost in finding and implementing new technology solutions by providing them with a digital sandbox, synthetic data and secure technology environments to experiment with the latest technologies and reduce compliance risks.

Additionally, both parties should meet regularly to address problems and improve technical integration and performance, with clear feedback on what works and what does not.

Naturally, solving these problems involves adaptation on both sides. Fintechs require dedicated relationship managers to oversee every step of the partnership, as well as legal teams and engineers who communicate with their counterparts at the banks.

The bottom line

As bank-fintech partnerships become more commonplace, customers stand to benefit from enhanced services. These partnerships help banks retain and attract customers, while fintechs gain funding and opportunities to scale their products through this new “co-opetition” model.

However, the success of these partnerships depends on their implementation. If one side is not sufficiently committed, or if corners are cut in payment innovations or technology integration, the consequences can be detrimental to both parties. Additionally, if deployed poorly, traditional banks risk falling further behind and cementing the dominant position of their challenger counterparts.

When delivered expertly, these partnerships can be extremely fruitful for both fintechs and traditional banks, as well as ushering in innovation in the financial sector. It’s a lifeline which offers legacy greater longevity.

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