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Bank-Fintech Partnerships and Trends 2024

Fintech and Banking | Dec 7, 2023

The Current State of Bank-Fintech Partnerships and Banking Trends and Insights

As we step into 2024, the financial landscape is undergoing a significant transformation, particularly in the realm of bank-fintech partnerships. A recent Forbes article by Ron Shevlin, titled "2024: The Beginning Of The End Of Bank-Fintech Partnerships," provides a thought-provoking perspective on bank-fintech partnerships which the importance has surged in the past few years highlighting that 70% of banks considered these partnerships crucial to their business strategies.

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These collaborations have been more than just about offering Banking as a Service (BaaS); they've aimed at enhancing lending productivity, growing deposit volumes, and increasing loan volumes.  However, the results from these partnerships have been mixed. Only a third of banks have seen a significant increase in loan volume from these collaborations, and even fewer have realized gains in non-interest income.

Challenges and Misconceptions

Shevlin identifies several challenges hindering the success of these partnerships:

  1. Many banks, especially those with assets under $100 billion, lack dedicated staff for managing fintech partnerships.
  2. Mismatched organizational structure. The absence of a hybrid model combining centralized teams for IT integration and business line personnel for partnership execution hampers effectiveness.
  3. Fintech partnerships require specific skills and experience, which are often lacking in traditional bank staff.  There is a lack of partnership competency.

Many of these so-called partnerships are, in reality, client-vendor relationships, lacking the shared risks and rewards typical of true partnerships.

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Shevlin predicts a decline in bank-fintech partnerships by the end of the decade. He foresees two possible paths for fintechs: either becoming established players in the banking industry or being acquired by larger bank tech firms. This prediction aligns with the trends observed in the bank tech space over the past two decades.

Implications for the Canadian Fintech Ecosystem

For Canadian fintechs and banks, this evolving landscape presents both challenges and opportunities. Banks are advised to:

  1. Shift from showcasing fintech partnerships as innovation to implementing tangible process improvements and revenue creation strategies.
  2. Banks should increase their investment in fintech startups and also actively implement their solutions.
  3. Innovation capacity should become a key factor in choosing fintech partners.  Banks should adopt a more data-driven approach in assessing the innovation capacity of tech vendors.
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2023 Banking Trends and Insights

The "What's Going On In Banking" 2023 report by Cornerstone Advisors offers a comprehensive overview of the current trends and technological advancements in the banking sector. These trends are shaping the future of banking:

  • Banks are heavily investing in digital transformation, with a significant focus on adopting emerging technologies like cloud computing, APIs, robotic process automation, and machine learning. This shift is driven by the need to enhance efficiency, improve customer experience, and stay competitive.
  • There's a growing emphasis on real-time payments. Many financial institutions are planning to deploy real-time payment systems in 2023, recognizing the need for faster, more efficient payment solutions.

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  • There's a noticeable shift in lending priorities. While commercial C&I loans and commercial real estate loans are gaining focus, other areas like mortgage/refi loans are seeing reduced priority.
  • The banking sector faces significant challenges in staff retention and recruitment, amplified by the trend of remote and hybrid work models. Banks are adopting various strategies to attract and retain talent in a competitive market.
  • Upcoming regulatory challenges, especially in areas like debit card interchange fees and routing, are poised to impact banks and credit unions, necessitating strategic adjustments.
  • Despite economic challenges like potential recession and rising interest rates, there's a surprising level of optimism among banking executives. This optimism is buoyed by factors such as increasing loan rates and the potential for improved margins.
  • Banks perceive Big Tech companies, megabanks, and fintechs as significant competitive threats. However, there's a notable decrease in the perceived threat from challenger banks compared to previous years.

Closing Thoughts

Banks must pivot from a transactional mindset to a more integrated, innovation-driven approach, focusing on mutual growth and value creation. Fintechs, on the other hand, must strive to carve out their niche, either by solidifying their presence in the banking sector or merging with larger entities.

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This period of transition is not just a challenge but a substantial opportunity for reinvention and growth in the banking sector. It calls for a strategic, thoughtful approach to partnerships, where the focus shifts from mere collaboration to achieving tangible, impactful results.

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