Big banks and fintech start-ups – partnering for customer experience and innovation

Posted May 26, 2016

Financial technology (fintech) firms may be small, particularly when compared to the titans of industry we traditionally trust for our day-to-day banking and lending needs, but they’re certainly fierce. As a growing source of disruption, traditional banking and financial institutions can no longer ignore them.

In his annual letter to shareholders last year, Jamie Dimon, JPMorgan Chase CEO, wrote, “It is unquestionable that fintech will force financial institutions to move more quickly, and banks, regulators and government policy will need to keep pace.”

JPMorgan Chase has now partnered with more than 100 fintech companies — and it’s not alone. Several major banks, such as Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo, have invested in fintech start-ups, too.

In 2015, total investment in fintech companies around the world reached roughly $19 billion, compared to $12 billion in 2014, according to a report from KPMG and CB Insights.

A start-up for every banking service

Banks are moving beyond equity investments, and are now scouting for new ways to not only integrate start-ups’ innovative technologies into their proprietary infrastructures, but to also help them create new services. Gartner predicts that by the end of of 2019, 25 percent of retail banks will use start-up providers to replace legacy online and mobile banking systems.

Fintech start-ups are developing tools that understand customer behavior. They are also looking to build bridges between isolated apps in efforts to offer a frictionless user experience — and their services are catching on fast. “Start-ups and emerging providers of digital banking platforms offer banks interesting opportunities for innovation,” says Gartner research director, Stessa Cohen.

A study from analyst firm EY suggests adoption of fintech products is relatively high for such a new sector, and that the risk of disruption is real. In a survey of more than 10,000 consumers across six countries, EY found that the adoption rate among digitally active consumers is likely to double this year.

Clearly, banks need innovative ideas and technologies, but simply jumping on the fintech bandwagon will not guarantee efficient financial services. “CIOs must prepare to manage the challenges of evaluating and selecting new vendors that may not have proven track records in the financial services vertical or may simply be new and untried without an extensive customer base,” says Cohen.

That doesn’t mean excluding untested technologies is a good blanket approach; some risk is inherent, but many fintech start-ups may be established enough to justify a partnership or an investment. Still, selling that internally can present challenges. “It can be difficult for CIOs to justify investment in their solutions to their boards and regulatory agencies, but don’t use that as a reason to exclude new vendors,” she says.

Partnership models

Banks and fintech companies need each other. It’s a delicate balance and several partnership models are emerging. Here are the most popular ways banks work with start-ups:

1. Extend outsourcing: Banks have been outsourcing their internal services to their outsourcing partners for a long time. It makes sense to extend a similar arrangement to customer-facing innovative services and apps that can match customer expectations of a modern banking experience to fintechs. JPMorgan Chase, for instance, is using OnDeck to help offer quicker approvals and same-or-next-day funding to some of its four million small-business customers.

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2. Invest in start-ups: Big banks seem eager to invest in start-ups to manage disruption. Goldman Sachs, Citi Ventures, JPMorgan Chase and Morgan Stanley have put their money in mobile payments company Square. Meanwhile, JP Morgan Chase and Goldman Sachs have bet on online brokerage Motif Investing, and Morgan Stanley, Bank of America and Citibank have all invested in Visible Alpha, a start-up offering a platform to interpret and forecast stock data. The benefits to both parties are significant. This is an easy way for banks to access innovative products and services that can benefit their business and get a leg up on the competition, while the start-up secures a huge distribution network and regulatory compliance.

3. Nurture new ideas: Many banks are plugging into the start-up community without buying any direct equity. They start their own incubators, accelerators or innovation labs to get early access to new technologies and ideas they may not otherwise discover on their own. Wells Fargo, for instance, has pumped funds into boot camps to support a start-up developing automated real estate transaction technology and another early stage company exploring voice technologies. Some banks also sponsor hackathons to discover new ideas, technologies and the best potential partners for mutually beneficial collaboration. Hackathons and other rewards-based competitions can get a bank’s brand some recognition in the start-up community, while exposing the bank’s staff to new ideas and technologies. The downside, however, is that there is no exclusivity in most of these partnerships.

No doubt, most banks and fintech start-ups are experimenting with multiple partnership models to cover their innovation bases. And these relationships continually evolve. As they scout for ways to reconnect the fragmented finance value chain, banks and fintechs are integrating their innovation strategies and learning to work like — and with — each other.

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