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Fintech and Financial Institutions: Development through Collaboration

The era of digitalization forced financial institutions to enter into efficient, speedy and transparent services.   

It’s obvious that during the last 10 years traditional financial institutions have encountered a number of serious shortcomings. The pandemic and rise of digitalization fully emphasized the necessity of transformation for financial institutions. 

COVID-19 revealed the gap between expectation and proposition, highlighting the need for modernization and adoption of a customer-centric approach. Globalization, the integration of borders, digital technologies, and evolving regulatory landscape showcase the challenges that traditional bank service structures and systems have. 

To catch up with drastic changes taking place in digitalization, financial institutions need to invest, innovate, and transform to remain competitive in the new reality. According to statistics, by professional services network company “EY”, Adoption Index shows that adoption of FinTech services has increased globally from 15% in 2015 to 64% in 2019. 

According to the “PWC” report "Redrawing the lines: FinTech’s growing influence on Financial Services" more than 4 in 5 (82% of) financial services companies plan to increase finTech partnerships in the next 3-5 years.

According to Statista, traditional banks and financial institutions have already started to acknowledge the advantages they will get in collaboration with Fintech companies that will expand their capabilities to provide more innovative services.  According to a survey conducted in December 2020 in the United States, digital account opening (29%), mobile wallet (22%), and fraud/risk management (20%) are the areas where US executives acknowledge the partnerships with Fintech companies. 

What are the main benefits fintech companies bring for financial institutions?

The collaboration of financial institutions and fintech’s brings innumerable benefits to both sides. Financial institutions are provided with technical support in navigating numerous challenges including:

  • Enhanced Digital Capabilities 

When it comes to technology opportunities, deploying fintech cutting-edge technologies, financial institutions gain agility and flexibility in providing innovative services as traditional banking institutions are limited in their technology capabilities. 

Financial institutions have started to test highly innovative and disruptive technologies such as blockchain, the Internet of Things (IoT), Artificial Intelligence (AI) to pivot into new technology-based payment propositions. Utilizing fintech’s new technologies, financial institutions can engage a larger customer segment. 

FinTech institutions can easily relinquish the control of technically challenging and time-consuming services to outsourced fintech companies that are focused on specific areas. In turn, also gain significant recognition and enlarge their business network.

  • Regulation Issues

Financial institutions face numerous regulation difficulties when it comes to regulations and customer-centricity. 

Fintech has a huge potential in fraud management and compliance processes that enable financial institutions for more viable and secure services. Generally, both sides should take into consideration regulatory risks, and financial institutions while accommodating fintech products must ensure all regulations are properly followed. 

On the other hand, fintech stays on top of compliance due to the stable regulatory base of the financial institutions. Fintech’s get the opportunity to be exempted from exhausting licensing and regulatory requirements, focusing on the customer acquisition and provision of their disrupting services.

  • Wide Market Penetration

In comparison to fintech start-ups, financial institutions tend to have much larger investment budgets and can secure a flow of capital for fintech development and accelerate market penetration at a faster rate due to collaboration with financial institutions. 

In addition, the spread of brand awareness for potential customers as the collaboration with prestigious and large banks triggers trust and confidence in the work of the fintech company.  

  • Financial Inclusion

Being able to have access to a financial service is the first step towards broader financial inclusion. Findex data shows that nearly one-third of adults – 1.7 billion – are still unbanked. To reduce this gap fintech and banks collaborations have new ways to address financial challenges and deliver payment services to financially underserved people. 

Disrupting technologies by fintech strategically introduced by financial institutions new digital banking products, such as e-wallets and internet banking that enable greater customer engagement and better service for underserved customer segments.

Fintech-financial institution's alliance is one of the basic elements of the future financial sector. As seen, the customer demand triggered the penetration of digital technologies, and the alliance of fintech and banks deliver transformational value for both sides increasing their potential for success.

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