Maintaining Compliance In A Market Of Bank-FinTech Tie-Ups

The vast majority of traditional financial institutions (FIs) plan to increase their collaborative efforts with the FinTech world, according to a PwC report published last year.

With competition heating up from the FinTech firms themselves, banks seek efficient, affordable ways to improve their services without having to entirely scrap decades of legacy infrastructure already in place. Partnerships end up a win-win: Banks remain competitive with leading-edge services while FinTech companies score market reach and the solid reputations of their bank partners. The inner workings of such a relationship are complex, not only as banks ensure that their FinTech partners’ solutions can integrate seamlessly into existing operations and infrastructure, but as banks face increasing regulatory pressures around data security.

In one of the more recent collaborative agreements struck between a bank and a FinTech, Orange Business Services and banking Software-as-a-Service (SaaS) firm additiv announced a partnership to provide traditional FIs with enhanced wealth and asset management services. The agreement highlights today’s collaborative spirit of financial services, not only as the firms team-up with banks, but as major telecommunications firms work with smaller FinTech firms, too.

According to Martin Kull, country manager of Switzerland at Orange Business Services, and Michael Stemmle, founder and CEO of additiv, these kinds of tie-ups enable banks to get new service offerings off the ground at a much quicker pace than if they were to build new services in-house from the ground up. The two-sided benefits of a bank-FinTech collaboration are certainly beneficial to FinTech firms like additiv.

According to the World FinTech Report 2018, published by Capgemini and LinkedIn earlier this year, “financial services customers have greater trust in the brands of traditional firms versus those of FinTechs.” Collaborating with traditional FIs means FinTech firms can reach customers who trust those banks. Seventy-five percent of FinTech firms surveyed said their top business objective is to collaborate with traditional firms, but 70 percent said lack of agility is the largest hurdle to collaborating with traditional financial services companies.

Stemmle said that working with a major conglomerate like Orange means a FinTech like additiv can have a more mature service offering for FIs. Banks, meanwhile, enjoy out-of-the-box solutions. Maintaining compliance and security, though, must be at the top of the priority list, according to Stemmle and Kull.

“Collaboration is exactly the overall idea behind the Digital-[Finance]-as-a-Service offering,” said Stemmle, adding that the emphasis on this particular collaboration is to provide FIs with wealth management as-a-service tools that meet FIs’ data management and compliance demands. While additiv provides the wealth management technology via its Digital Finance Suite of solutions, Orange enables financial institutions to implement and “plug-in” to the technology via the cloud. It is paramount that the offering adheres to an “off-premise, on-shore” design, he explained.

Stemmle added, “That means that the bank can get away from its own data centers and into military-grade, secure cloud infrastructure that is still in each jurisdiction of the bank. For today’s financial services industry, it is very difficult to operate out of the cloud with customer-identifying data in certain jurisdictions.”

Ensuring that banks can operate out of the cloud, yet ensure data remains within their jurisdiction, means these institutions can remain compliant with data security rules, he said.

Kull pointed to Orange’s cybersecurity unit that provides corporate customers with risk management and data security services. Much like a FinTech provides a traditional FI with ready-made solutions, a third-party cybersecurity firm can offer FIs top-level security that negates the need for the bank to develop security solutions and invest in security personnel in-house.

Banks are flocking to FinTech partners to remain competitive. According to a recent report on bank-FinTech collaboration, the biggest competitive threat to an FI is not a FinTech, but another FI better leveraging the benefits of FinTech collaboration. Still, FinTech companies (and their own partners) must be able to prove to traditional FIs that data storage will not only be secure, but will be compliant with increasingly complex regulations.

Stemmle added that there is a “perception gap” among some FIs when it comes to working with third parties to safeguard data. There is a “learning curve,” he noted, but that through conversations with decision-makers at banks, Stemmle and Kull have been able to educate FIs about the security and compliance that even cloud-based platform provide.

“The reality is, most banks think they have cybersecurity experts in house, but the question is simple. [Who] would you trust more: a Fortune 500 cybersecurity expert, or the cybersecurity guys in the bank?” said Stemmle. “This is the perception gap. Cloud offerings are as compliant and safe as any on-premise-installation, but the perception doesn’t always follow that.”