Bank-fintech partnerships are not “doomed to fail,” as one commentator recently suggested in an American Banker op-ed. Rather, the banking industry is at the dawn of a great new era of fintech partnerships that will change banking as we know it for the foreseeable future.
There is substantial opportunity for community banks to transform their infrastructure and customer offerings, but doing so takes time — time that could be better spent meeting with customers and making loans that transform their communities. The problem for community banks is that many of the largest incumbent tech companies serving the U.S. banking system (upon which community banks have relied to provide digital solutions) are moving too slowly to bring these solutions to market for their banks.
Meanwhile, startup and early-stage fintech companies are unbundling their larger counterpart, not banks. These early-stage fintechs are focused on specific tools that are helping banks, including community banks, provide better digital services. After all, each community bank is unique, so solutions will differ from bank to bank.
Banks are fintech consumers because they don’t have the resources to focus and tackle these problems on a day-to-day basis. This challenge actually creates a win-win for both parties. To use a baseball analogy, fintechs are a minor league farm system for banks. Those that progress build and cultivate the right offerings to partner with banks. They eventually make it to the big leagues and will likely be bought by banks or a larger fintech firm. Eventually, fintech and banking will merge, and we will simply call it banking in some form or fashion, such as digital, mobile or virtual banking.
While the consumer experience is changing, the concept of banking is not. It is still a vehicle to manage and move money, and it involves elements of safety, relationship, trust and convenience. This is why banks will not only remain relevant but will be the winners in the digital era.
This is precisely why the open banking evangelists and those who continue to predict the end of banks will be proven incorrect. Will banking become more software-oriented and digital, and will solutions be more cost-effective, scalable and provide a better experience? Absolutely. In fact, there is a good chance the future of fintech will be akin to a large “iTunes store” of application programming interfaces that banks can pull from to advance their specific niche or strategy.
However, the primary hurdles of open banking remain: trust, standards and regulation. I predict it will take about a decade to iron out those issues. So, while we may very well get to open banking, it will take a considerable amount of time to overcome these hurdles, particularly in the United States.
To get there, fintech and banking partnerships will be critical. Today these partnerships are standard operating procedure, part of the daily build, buy or partner strategic decisions that banks and fintechs make every day. The examples continue to grow with community banks like Mercantile Bank, River Valley Bank, Quontic Bank, nbkc and Live Oak Bank serving as inspiration for innovation that can be achieved.
This process isn’t easy for banks, but nothing worthwhile ever is. These partnerships require leadership, a cultural shift, strategic commitment, diligent vendor management and regulatory preparation.
Fintech is at the heart of the future of banking. Rather than a period of doom and gloom, the banking industry is entering a golden age of successful fintech partnerships.