Here’s what’s next in the vital (and complex) relationship between banks and fintech in this economy
Fintechs and banks began their partnership journey over a decade ago, driven by the mutual goal of enhancing financial inclusion. While banks traditionally move cautiously with technology adoption, fintechs, with their speed and innovation, filled the gap by bringing new products to market quickly and efficiently.
This relationship aimed to cater to the underserved and unbanked, particularly small and medium-sized businesses seeking additional financing beyond the restrictive credit criteria of banks.
Initially, banks were slow to adopt and accept fintech partnerships as firms saw these collaborations as a risk to market share and margin shrinkage. But fintech partnerships gradually demonstrated their potential to streamline processes, reduce costs and accelerate financial inclusion.
Despite the promising prospects, regulatory oversight lagged, resulting in recent enforcement actions against banks involved in fintech relationships. In just the past 12 months there were at least six enforcement actions put on banks for their fintech partnerships. The responsibility for these actions lies with three participants.
- Banks: They lacked a comprehensive understanding of the risks involved and failed to hold fintechs to the same standards as they held themselves.
- Regulators: The concept of partnership between banks and fintechs was new to the overseers, and they should have provided more guidance to both parties.
- Fintechs: They underestimated the tough regulatory and oversight environment within which banks operate.
With heightened regulatory scrutiny and economic uncertainties – including an impending election year, fluctuating interest rates and wage inflation – fintech-bank partnerships are more crucial than ever.
On the governance side, to ensure success, regulatory bodies such as the Federal Reserve, FDIC, and OCC must facilitate transparent discussions through roundtable forums. These discussions should provide a blueprint for navigating regulatory complexities and ensuring the viability of partnerships.
The economic landscape, marked by layoffs, wage hikes, inflation, and interest rate fluctuations, underscores the urgency for agile financial solutions. Layoffs, particularly in large corporations, are driving a surge in entrepreneurship, necessitating accessible financing avenues for emerging small and medium sized businesses. Wage increases, like California’s minimum wage hike, for example, prompt businesses to reevaluate their operations, potentially leading to layoffs and price adjustments.
Inflation will continue to erode purchasing power, forcing businesses and consumers alike to seek quick financing solutions. While traditional banks adjust lending criteria in response to economic shifts, fintech’s often offer more flexible terms. Consequently, as economic challenges increase, partnerships between fintech’s and banks will likely increase, as well, driven by the need to enhance competitiveness and efficiency.
In the light of a more challenging economic landscape, competition and consolidation will continue to rise within the fintech sector. Low on funds, many fintech companies will find themselves considering the option of merging with others to get through these tough times.
Economic adversities are forcing fintech firms and banks to forge more partnerships, viewing collaboration as a strategic means to streamline costs, enhance product offerings, and secure a competitive edge. In 2023, nearly 39% of consumer personal loans stemmed from partnerships between fintech firms and banks, indicating the natural rise of these alliances in the financial landscape.
A pivotal consideration for banks in navigating the evolving financial landscape is the shifting demographics of the U.S. population. Both merchants and consumers now demand expedited processes, with an emphasis on seamless online applications with quick decision-making and turnaround times. It’s essential for banks to adapt to these changing expectations by deploying technologies that facilitate rapid application processing and turnaround times, aligning with the demands of today’s tech-savvy clientele.
The survival of banks relies significantly on their ability to mobilize adequate capital and IT resources to innovate and adapt. Without developing automated approval and funding processes, banks risk becoming obsolete in an increasingly digitized financial ecosystem. However, there is a lifeline within strategic fintech partnerships. By seeking out the right fintech collaborator and encouraging open communication with regulatory bodies, banks can position themselves to thrive amidst the transformative economy.
Recognizing the evolving demographics and consumer preferences, banks must prioritize digital transformation to remain relevant. Failure to adapt risks these institutions becoming obsolete, but collaboration with fintech partners can offer the necessary technological capabilities to meet evolving demands.
While continuing to navigate the complexities of today’s economy, banks and fintechs must collaborate effectively, leveraging each other’s strengths to foster financial inclusion and resilience.
Through proactive engagement with regulators and strategic partnerships, banks can navigate the evolving landscape, ensuring their continued relevance and prosperity in an ever-changing financial ecosystem.
Rick Kuci is the COO of FundKite. He was formerly Chairman and CEO of Grove Bank & Trust in Florida.
