Bank Regulation

Whose Customer Is It When Banks And FinTechs Collaborate?

FinTech and banks have long been painted as natural enemies vying for control of the future of consumer finances – but that view is a little out of date, notes Entersekt CTO Gerhard Oosthuizen. These days, banks and FinTechs are increasingly realizing they’ll work better together than apart. But the consumer relationship is up in the air – and while it is an exciting time for banking, it’s a scary time for banks.

It’s not easy being a bank these days, and it’s often easy to overlook how many challenges traditional banking players face, on many fronts.

“Banks are burdened with a lot of challenges that are not of their own making or design,” Gerhard Oosthuizen, CTO at Entersekt, said in a recent conversation.

Banks, he noted, have to be compliant with a host of extremely stringent regulations, and often across multiple jurisdictions – all with different rules. Banks can’t just sign on new users a la Facebook or Twitter: Instead, they are required to go through a rigorous KYC process to ensure that account holders are all actual, verifiable human beings. Throw into the mix consumer protection guidelines, active anti-money laundering checks and capital requirements, and things get difficult, Oosthuizen noted.

On top of that, there’s the complication of doing all of it with legacy systems that can’t always withstand innovative changes, new business models or the latest wave of digital disruptors that seem to be upsetting the industry applecart. And, Oosthuizen noted, with open banking becoming a reality in Europe, those competitors’ more digital offerings aren’t going away anytime soon – in fact, they are becoming more wired into the core of customers’ daily financial activities.

“It’s an exciting time for banking,” Oosthuizen said. “But it is a scary time to be a bank.”

And, he noted, banks and FinTechs are going to need time to negotiate their relationships with each other, and with consumers the world over.

Why Banks Need FinTechs

Not all of banks’ troubles are externally inflicted upon them, however. There have been plenty of self-inflicted wounds along the way, mostly the result of banks’ inability to make the most of the “incredible wealth of customer data at their fingertips.”

“If [banks] had applied some of the innovative thinking we’ve come to associate with FinTechs and digital players, they might have noticed when a customer has paid the last installment on their home loan, for example, or begun shopping at a new store,” Oosthuizen said. “That could have been informing the services and advice banks present to customers, and would have helped to strengthen and develop relationships.”

The good news, Oosthuizen said, is that banks are well aware at this point that they have missed a trick in this arena. They want to be at the center of the action, and they know that the tremendous wealth of data at their disposal uniquely qualifies them to act as their customers’ trusted financial advisors. Moreover, they realize that if they aren’t willing to play that role, there is certainly a start-up that would be delighted to fill the gap.

“Banks want to become more data-driven – they know they need to, but doing so is not something that will happen overnight.” And increasingly, banks are starting to think of FinTechs not as the enemy, but as potential partners. “They are realizing they are going to have to trust FinTechs,” Oosthuizen said, noting that if banks want to make the “digital jump,” they will need some help from a third party.

Why FinTechs Need Banks

Just 18 months ago, the popular narrative was the wave of global FinTechs that had come to disrupt banks, Oosthuizen noted. These days, he said, the talk is more about partnership, and attaching FinTechs’ speed and data facility with traditional banks’ scale and strengths.

There’s a good reason for this. Being a bank is hard – and as growing FinTechs find themselves facing the same compliance issues that their big brothers in banking have spent 50 years building functional networks to deal with, they’re realizing that it’s hard to build from scratch in a competitive way.

“[FinTechs] see regulation and compliance as a formidable challenge,” Oosthuizen said, adding that FinTechs often aren’t aware of the practical implications of regulatory compliance.

Moreover, he noted, FinTechs tend to underestimate the value of the reliable and secure network that banks have built, which works almost everywhere in the world and is compliant with existing rules and regulations. “For example, when a consumer travels, he or she can take their credit card and insert it or swipe it at any card reader anywhere in the world, and money moves instantly. If they have a problem with their card or account, they can call their bank to get it sorted. When a new FinTech launches a product, there is no branch to go to, or phone number to dial, just an anonymous email address.”

From the outside, Oosthuizen noted, banking looks easy. But once an organization begins to wade into all the things it truly means to function like a bank, they quickly realize they don’t want to be a bank. “They don’t want to go through the time-consuming process of following all the procedures and meeting all of the requirements involved. It’s really not an easy task.”

When the Consumer Gets to Choose

Going into an era where banks and FinTechs are increasingly motivated to work together, the interesting question will involve the consumer relationship, and who “owns” it.

“Customers, for the first time, are really in a position to choose, and that is a scary proposition for banks,” Oosthuizen said. “There are a lot of market factors and regulations that are pushing banks – but they certainly don’t like it when they see firms like Apple, Google and Samsung operating customers’ wallets.”

The banks, of course, want to be the central and controlling player in a customer’s financial life. And, Oosthuizen said, they have the advantage here, even today. Study after study shows that consumers trust their banks. In a world where banks are efficiently leveraging their customers’ data, they can play an extremely central role as trusted advisors to their customers.

“This is something we’re going to have to watch and see how it plays out: whether banks offer something that reinforces the trust relationship they have with customers, or whether they fall into the background when it comes to relevance and being front of mind for the customers’ financial interactions,” Oosthuizen noted.

Moreover, he said, banks might have the edge in a world where there seems to be a new “Pay” service launched every few months. With too many choices, consumers could default to what they already know and trust. This could be the tipping point that allows banks to re-affirm their advantage.

If banks can offer a convenient mobile solution that provides a range of financial services – banking, payments or financial management, for example – all in one easy-to-access place, they could remain a key force to be reckoned with in the industry.

“But if they don’t move fast enough, customers will be forced to experiment with alternatives, and find that those work ‘well enough’,” said Oosthuizen. The ultimate success will lie in partnerships that combine the strength and reputation of banks with the innovation and agility of FinTechs. If banks can get that right, they can thrive.

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