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Overcoming Legacy Tech For Better Bank-FinTech Collaboration

FinTech competitive forces are often considered the largest source of pressure on traditional financial institutions (FIs) to innovate, particularly when it comes to small business (SMB) banking. Once SMB-servicing FinTechs emerge with enhanced products and services, entrepreneurs are going to want to see the same, high-level offerings from their banks — and are willing to switch providers to get it.

Interestingly, this competitive pressure from FinTechs has introduced an incentive for traditional banks to collaborate with these newcomers. But there are other forces at work driving this banking ecosystem of partnerships and integrations, explains Adam Nanjee, SVP of Digital Banking at Zafin, a banking software platform. In today’s environment of competition and regulation, he told PYMNTS, banks aren’t looking for just anybody. They have sophisticated demands when choosing FinTech partners.

“There is a huge desire for banks of all sizes to partner with financial technology companies,” said Nanjee. “But banks are looking for very trusted platforms.”

Zafin recently announced a partnership with Empire Startups, a think tank of FinTech innovators, to offer banks a way to more seamlessly connect with third-party FinTechs.

“It’s given us the ability to hear banking partners say, ‘We want to partner with more FinTechs, but how do we do that when there are so any different types of businesses?’” said Nanjee. “There is a very strong desire from banks to drive amazing customer experiences and partner with new technology companies and give services and products to their customers in a way they could have never done before.”

He added that this is particularly true in business banking, which has been underserved and lacking in digital services from traditional FIs.

“From a business banking perspective, I would say the notion we’ve heard across the board, globally, is that this segment is the most underserved banking segment from a digital perspective,” he said. “Small businesses still require a tremendous amount of paper to get access to credit, or to new products, or to onboard new employees. Banks recognized, particularly in business banking, that many of the FinTech solutions they were looking at were complementary to their business to drive digitization.

“There is a sway,” continued Nanjee, “towards partnering and providing small business users with an experience.”

But as banks turn to FinTech disruptors to digitize and enhance the customer experience, there are other factors — and challenges — that come with the FinTech collaborative spirit.

Banks’ legacy systems make it more difficult to develop proprietary services, making FinTech collaboration and integration an even more attractive proposition. But legacy systems are also making it more difficult for banks to react to other market forces. Take interest rates, for instance. Today, Nanjee said, banks around the globe have to consider potential rate fluctuations “on a quarterly basis.”

“Banks need to be able to accordingly price their strategies for loans and deposits,” he said. “What we are starting to see in a rising rate environment is banks using pricing strategies and execution as a way to compete and differentiate.”

Financial institutions have to be able to be agile with price changes, but legacy systems make this difficult too. Nanjee explained that banks’ collaboration with the Zafin platform itself is another example of how third-party collaboration can improve flexibility in pricing strategies.

The FinTech partnership trend is also a way to address the issue of the rising demand for open banking, he added.

Again, however, banks’ legacy systems can present a major challenge around the issue of data aggregation and analytics, and in North America, where open banking is not a regulatory requirement, financial institutions may run into some roadblocks.

“Digital banking FinTechs today can put out a new product or pricing whenever they choose, and they collect data and deploy algorithms,” said Nanjee. “It’s very challenging for a bank. They have a ton of data, but to actually collect that data together is almost impossible.”

North American FIs are looking to Europe to see how PSD2 and Open Banking will play out, he said, and how these regulations impact enhanced data protection requirements. Banks will also be looking at how their European counterparts address the challenges that legacy infrastructure poses when it comes to aggregating and opening up data to third-party FinTechs.

“What banks are saying in North America is that there has to still be the same level of trust and security and protection across data,” said Nanjee. He added that traditional banks continue to hold trust with small business customers, making them even more picky when it comes to choosing FinTech collaborators.

The rise in FinTech collaboration is pushing small business banking to new heights, but it’s unclear exactly how this trend will play out in the SMB FinServ space. Nanjee said that because of the trust SMBs have with their main bank, they’ll probably be looking to stick with one provider instead of using multiple alternative FinTech platforms for their needs.

“There is so much technology out there, and particularly on the business side, SMBs will still go to banks for lending, cash management and daily banking,” he said. “But the emergence of other platforms will see a shift towards third-party solutions.”

“There is a fine balance right now,” he added, “between offering customers a phenomenal experience by FinTech partnerships and the competitive threat of FinTechs taking banks’ business.”

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