January 3, 2018
Excerpt: Although financial institutions still fear that competition with FinTechs will erode their revenue and threaten their businesses, a preponderance — 82% — expect to increase partnerships with FinTechs over the next three to five years.
Roughly 82% of financial institutions expect to increase their partnerships with financial technology firms (FinTechs) over the next three to five years, according to a recent report by PwC. This is a big change for industry leaders who traditionally feared FinTechs as competitors — and worse, as dangerous start-ups who understood neither the culture of traditional banking nor the regulatory environment bankers operate in.
Next year will be one of partnerships between banks and FinTechs.
Fear of FinTech Competition Coupled with Plans to Partner and Collaborate
The anxiety about FinTech competition is still present. The same report, in fact, found that 88% of financial institutions fear that FinTechs are taking revenue from traditional lending institutions, 24% more than felt that threat last year. Eighty-two percent feel their business is at risk from FinTech competition throughout all verticals — 13% more than last year.
But all the respondents felt that partnership and collaboration were the answer, not running away from FinTechs. Many plan to innovate from within as well.
The firm grasp of the need for collaboration means that financial institutions are moving from the year of the consumer to the year of the partnership.
In a year of political upheaval and weak commercial credit growth, lenders sought to capitalize on an economic bright spot — consumer spending — by reviving the personal loan, allying with FinTechs, and exiting traditional business lines that no longer made sense.
Eighty-two percent of financial institutions expect partnerships with FinTechs to increase over the next three to five years.
Moving Together, Not Apart
Part of the reason for the year of the partnership is that FinTechs have matured in understanding the financial and banking sectors. They understand banking’s regulatory environment much better than they once did.
Indeed, most FinTechs now understand that banks have a regulatory environment and that this environment is crucial to understanding and dealing with banking. No longer is it the sign of a nimble FinTech start-up to think regulation can be leapfrogged, jumped, or ignored.
Banks, for their part, are feeling more comfortable with FinTechs because they are showing maturity in their understanding of issues unique to the banking sector.
FinTechs definitely have an edge in appealing to some potential customer groups. They tend to appeal to the underserved, such as start-up businesses or small businesses that don’t have a sufficient track record for a traditional lender. They also appeal to more youthful demographics, who embrace cashless banking and quick online applications.
Many observers believe that next year could be a banner one for small business lending. The booming economy has helped small businesses prosper, and led to improved credit scores and prospects. Rising interest rates are likely to make lending to the sector more profitable.
Currently, 22% of loan applications made by small businesses are to alternative lenders. As a result, banks looking to increase their profit margins could partner with alternative lenders in the small business loan space.
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