Banks and FinTech

Competition vs. Collaboration

Traditional banks have adopted different approaches to rising competition from the growing ranks of financial technology (fintech) players in the financial services industry, ranging from lavish spending to develop their own technology offering to pushing for greater regulations of fintechs in order to raise the barrier to entry. But a growing number of banks, particularly small and medium- sized, are choosing to partner with, invest in, or acquire fintech firms to boost their own capabilities, while allowing fintechs to “piggyback” off of their regulated status. We spoke to RANE expert Thomas Firnhaber, Founder and CEO of Stonebridge Partners, LLC, about what this might mean for the financial services industry.

Partnerships between banks and fintechs create new opportunities for both entities, according to Firnhaber:

  • Small to medium-sized banks do not enjoy the same large budgets for new technology development as larger banks, such as J.P. Morgan’s much-publicized commitment to spend $10.8 billion on tech innovation in 2018, so partnering with fintechs allows these smaller organizations to offer new technologies to customers without the large financial investment required to develop them from scratch.
  • Conversely, fintechs rely on their banking partners for access to low-cost funds, their preexisting customer base, and, perhaps most importantly, the blessing they have already received from regulators to conduct banking activities.

The US regulatory framework around fintech in banking is complex and still in the process of being defined. The House of Representatives’ newly formed “FinTech Task Force” recently heard testimony from both US and British regulators on how to craft regulations that both protects consumers and encourages continued innovation, a sign that new fintech-related legislation may be on the horizon.

  • So far, the burden has been on banks themselves to ensure that their fintech partners are remaining compliant with current regulations and turning away business from those that aren’t. Robust due diligence is critical for banks to evaluate compliance in their partners, as they will be “on the hook” in the event of any lapses, says Firnhaber.
  • Bank-fintech partnerships are largely unexplored territory for most regulators, and Firnhaber believes that US regulators are hoping to proactively gain a better understanding of the industry in order to avoid a situation where a new product or technology needs to be retroactively banned after it has been released.
  • Shifting perceptions of overall risk in the fintech industry will shape how regulators approach bank-fintech partnerships, according to Firnhaber. Analysts believe that these organizations will become a greater focus for regulators in the event of a crisis event at a fintech company that could create a sense of anxiety or stigma about the larger fintech space.

The shifting regulatory environment creates challenges for businesses operating and pursuing continued innovation in the space, according to Firnhaber.

  • Bank-fintech partnerships need to be prepared to react quickly to any new regulatory requirements that emerge. Firnhaber uses the regulatory debate over how to classify cryptocurrencies as an example of the significant impacts that regulatory decisions can have on business operations, as the outcome of that debate will have fundamental impacts on how such a company structures itself.
  • Firnhaber also points out that many employees at fintech companies, particularly those with a background in technology rather than finance, do not have experience operating in a highly regulated environment.
  • Ultimately, Firnhaber states that businesses need to find a balance between continuing to innovate and think creatively, while also being prepared to adapt should the regulatory environment shift in the future.

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