Sibos 2024: Navigating partnerships between banks and fintechs
The relationship between banks and non-bank players like fintechs has been an ever-evolving mix of collaboration and competition.
The relationship between banks and fintechs has been an ever-evolving mix of collaboration and competition
Many observers see this dynamic as a reflection of the increasing influence of non-bank fintechs in financial services, sometimes even encroaching on the dominance of banks.
These non-bank players now serve tens of millions of customers who were previously underserved by traditional banks and have also redefined their roles in partnerships.
A study by the Boston Consulting Group finds that by 2030, non-banks, including fintechs, payment firms, and FI tech providers, could contribute as much as 50% of the financial sector’s market capitalisation.
This potential shift raises essential questions about how non-banks will evolve and what their rise means for collaboration with the traditional banking community.
These questions were addressed at the 2024 Sibos conference held in Beijing, China last week.
Tech adaptation vs legacy systems
In a panel session at the Sibos conference, Souleïma Baddi, CEO of Komgo, a fintech company focused on digitising trade finance, began by noting that, while partnerships hold promise, banks face unique challenges in adapting to this new era.
“Banks are having a wider role and want to be much more supporting and proactive and global with their clients,” said Baddi, a former banker.
Baddi emphasised that regulatory and technical complexities make it difficult for banks to engage with tech partners. She said “the weight of regulation… the increasing complexity of managing legacy systems with innovative technologies… and the willingness to do more with your clients” complicate how banks can work effectively with tech companies.
For Baddi, fintech companies and external partners can act as enablers, helping banks to “provide more services to their clients at a faster pace than if they would do it themselves”.
However, she pointed out that banks need to tread carefully amid stricter regulatory oversight. This makes the establishment of a proper engagement model essential.
“How, as a big institution, can you engage with a fintech company when you’re completely swamped with regulatory requirements or legacy system upgrades?” she asked. “So, this engagement model is crucial in the thought process of the banks.”
Model for engagement
Without a clear model for engagement, banks may struggle to capitalise on collaboration benefits. Baddi observed that many banks have had difficulty navigating this journey in recent years because “they haven’t thought about this engagement model”.
“The banks who succeed in doing it really can scale their business [and] bring more services to their clients,” she added.
Ashish Bajaj, Managing Director and Global Head of Financial Institutions Sales for Citi’s Treasury and Trade Solutions, added: “One of the things about working with fintechs, apart from it being the right thing to do, and being the thing which will succeed, is that the bank is actually very clear on the use case and on the complimentary nature of the partnership.”
Reaffirming Baddi’s point, Bajaj highlighted that banks operating globally face substantial complexity, which can potentially translate into operational difficulties in executing partnerships with non-bank entities.
“Getting that use case right and getting clarity… that’s what I would submit,” he added.
Erica Kostelijk, Head of Transaction Banking at ABN Amro Bank NV, examined the possible risks of partnering with fintechs.
For Kostelijk, successful bank-fintech collaborations require aligned goals and mutual benefits. However, a key element is accountability.
Outsourcing arrangements
Kostelijk noted that banks are often responsible for regulatory compliance on behalf of their partners, even when those partners aren’t held to the same standards. This creates a “complex situation”, especially in outsourcing arrangements, where banks may face additional dependencies and risk management responsibilities.
She advised banks against linking to “whatever the partner in whatever shape or form is doing”, warning that in a heavily regulated environment, a fintech partner with lax compliance standards could bring regulatory scrutiny onto the bank.
“[The regulator] then will call upon us banks to say, well, you referred your customers to this company, you solve it,” Kostelijk stated, emphasising the need for carefully structured “outsourcing” models.
Manish Kohli, Head of HSBC’s Global Payments Solutions, added that for banks with the right controls in place, the regulatory environment can actually serve as a “big tailwind towards fintech and bank collaboration”.
Partnerships with fintechs, he noted, allow banks to bring new solutions to market faster while upholding regulatory priorities.
Who owns the customers?
Kohli outlined three ways banks can engage with fintechs. First, fintechs can enhance banks’ customer value proposition by broadening access to embedded finance flows.
Second, fintechs themselves can be valuable clients for banks, as they are “fantastic” aggregators of fund flows in the economy. Lastly, when there is strategic alignment, banks may be inclined to invest in fintechs.
Reflecting on the evolution of the bank-fintech relationship, Kohli recalled that the focus was once on “customer ownership”, with banks and fintechs debating who ultimately “owned” the customer.
Today, he observed, this debate has subsided as both sides now set their sights on improving the customer journey.
“If you’re in financial services, nobody owns the customer. The customer owns you,” he quipped, noting that today’s dialogue is far more collaborative and focused on enhancing the customer experience.
