By Dima Kats, CEO, Clear Junction
Despite the disruption of the financial industry due to the pandemic, Brexit, changing regulations and more, UK fintechs have managed to secure $4.1 billion in funding in 2020 and are a key growth driver in the UK finance sector. In response to this rapidly shifting environment, incumbent financial institutions have approached experts from smaller fintech firms with niche expertise that can provide their customers with bespoke and streamlined digital solutions, whatever the business strategy.
McKinsey’s research shows that the share of fintechs with B2B services increased almost 16% from 2011 to 2016, highlighting a significant shift in start-ups away from pure B2C offerings towards partnerships with financial institutions. Partnering with fintech experts helps financial institutions navigate a multitude of challenges including compliance, digital offerings and expanding into new markets.
The challenge facing financial institutions
The Covid-19 crisis and Brexit have both come on top of the pre-crisis challenges to traditional financial business models. Before the pandemic, financial institutions were already tackling numerous problems, such as changing customer expectations, higher operating costs, and innovative technology, all within an evolving regulatory landscape. As economic shocks to people and businesses continue, so too do the risks of banks’ lending increased amounts of money. If these institutions want to prosper in a post-Covid world, they need to modernise legacy banking platforms, which can be a risky process.
Since 2008, the volume of regulations globally has increased at a rapid pace and led to a crisis of non-compliance surrounding payments across challenging borders. Brexit has led to uncertainty among some European banks concerning British origin transfers. As the UK is still a member of SEPA, payments should be accepted in the same way as they were before Brexit, but the fact that some aren’t shows the confusion that exists. Additionally, the US is increasing its sanctions on Russia, and Germany looks likely to change governing party for the first time in 16 years. These new political forces in Europe and America are likely to create added uncertainty in an already complex compliance environment.
The challenges facing financial institutions are numerous and complicated. The rise in non-compliance signals the challenge some of these players are facing. Meanwhile, small fintech start-ups are disrupting the finance sector and generating vast amounts of money. It is no wonder many of these groups are seeing each other as potential partners rather than competitors.
Partnerships are positive
The benefits of partnering with a fintech go beyond increasing revenue. From challenger banks such as Revolut and, credit innovators like Klarna, fintech firms have quickly become serious players on the global finance stage. One of the reasons for this market growth is the innovation in software and technology that fintechs provide. Digital native fintechs can often supply a more tailored and streamlined digital customer experience than legacy institutions. This allows larger organisations to accelerate their growth strategy by outsourcing trivial aspects of their business, which allows them to focus on the bigger and arguably more fundamental areas.
A partnership between a fintech and financial services company also allows financial institutions to offer customers useful features and functions previously unavailable, such as money management tools or mobile check deposits. Partnerships with large institutions can also give smaller and newer fintechs access to a larger market and business network. The legacy institutions gain the ability to relinquish control of some of the more costly and time-consuming functions to smaller partners who focus on these areas, with the possibility of white- labelling the solution. Outsourcing a function such as payments means that compliance and data security become solely the remit of the payment‘s expert rather than the partner.
The partnership between fintechs and financial institutions can be quickly scaled up or down, depending on consumer response and overall needs. If the initial partnership is a success, the two (or more) companies can brainstorm ways to deepen the relationship or add more services and features. This agility, innovation, and customer experience upgrade provided by fintechs enables mature financial institutions to explore new customer segments and engage new markets with an up-to-date, digitally prepared set of services.
Facing the future
The multiple challenges the finance industry has faced over the last year has highlighted the need for fresh thinking to face the future with strength and confidence. Fintech partnerships can create a significant opportunity for streamlining internal processes, adding technological capabilities, and improving the end customer experience. Companies like Clear Junction offer businesses a combination of these benefits and opportunities at one time. Continued collaboration and partnerships between fintech companies and banks are essential for the future of the financial services industry, the finance sector, and meeting the changing expectations and needs of customers, who are prioritising speed, service, and digital access.