By Mario Hernández, Founder and CEO
More and more we hear the term “FinTech” used in everyday conversations. Yet, there is still confusion, even within the financial services industry, as to what exactly this means for banks, and how those partnerships should best be managed.
Banking is one of the most regulated industries. Regulators seek to protect those who deposit their money in banks that perform financial intermediation. In simple terms, when I deposit my money in a bank, I know the bank will use those funds to lend money to another person who needs a mortgage, car loan or credit card; or to a company that needs working capital to buy inventory. That is the role a bank plays as a financial intermediary.
Regulators seek to protect the interests of depositors, and there are laws regulating cash flows to banks. On the other hand, there are internal and external audits. Finally, there are the international regulations of correspondent banks and bodies such as Basel III.
These regulations have caused a bottleneck in the ability for banks to innovate technology solutions that bring convenience to their customers. I have seen studies that show that of the total technology-focused personnel that a bank has, less than 5% are dedicated to creating innovative solutions that help customers. This creates an opportunity for FinTech companies.
FinTech companies, not being financial intermediaries, are not subject to regulations, at least for the moment. This makes them more agile and faster in their processes for developing new technology solutions.
The problem arises when FinTech companies require a banking platform to launch their products. Many FinTech entrepreneurs have no prior banking experience, and are unfamiliar with the realities that banks face when they want to acquire a new product, including: new product committees, operational risk committees, permits from regulators, auditors getting involved, and more.
This is where three things can happen:
1. A FinTech company attempts to launch its product with a Bank, which can take a lot of time.
2. A Bank and FinTech company look for a “happy medium” together, to comply with regulations and launch the product in less time.
3. The FinTech entrepreneur launches the product without help from the bank. This is where disruption occurs.
Bankers should be aware of these realities. The proliferation of FinTech companies are fragmenting the industry and can turn the banks into commodities of money. Alliances are key in these cases at every step and should be well thought out depending on the strategy of each bank, and the possibilities for innovation.
If Banks and FinTech companies can work together to benefit the customer, we will be able to improve service offerings, and the Bank will be able to position itself as an innovator with a competitive edge, attracting more customers, and benefitting all parties.