Banks and Fintechs: Where the Wild West and Legacy Are Won  

With the number of money and investment apps on the rise, banks have been facing different competition in the form of fintechs. Now that consumers have tasted digital wallets, peer-to-peer (P2P) payments, early pay, and even zero overdraft fees, there’s no putting the genie back in the bottle. Meanwhile, regulators are having a hard time keeping up as technology innovation continues to happen.

In some cases, financial institutions try to beat their nimbler rivals. Take JPMorgan, which recently took a page out of fintechs’ book by introducing early direct deposit for some of its customers. JPMorgan CEO Jamie Dimon has bemoaned the unfair advantage given to fintechs for not having to adhere to the same strict and costly regulatory oversight that is inherent in the legacy banking industry. Behind closed doors, he is pushing for that very innovation.

Dimon’s disdain for bitcoin is a good example of the threat that legacy banking perceives innovation to be. By the same token, the bank is investing heavily in technology. Chase recently opened up a lounge in the Decentraland metaverse, a 3-D virtual reality in which digital avatars and non-fungible tokens (NFTs) take the place of real life. Dimon even makes an appearance in the bank’s metaverse lounge, as does a loose tiger.

Meanwhile, other banks have decided that if you can’t beat them, join them and strike up partnerships. Increasingly these two unlikely peers are opting to put down their swords and are collaborating, as battered fintech valuations amid higher interest rates and rising inflation have leveled the playing field somewhat.

According to the most recent data available from a PwC poll, 42% of banks have established some form of partnership with fintechs. More than 90% of financial institutions believe fintechs have the potential to bolster their banks’ revenues in the coming years.

Community banks, of which there are approximately 5,000 in the United States, have been quick to roll out the welcome mat for fintechs. These financial institutions provide the “bank” in banking as a service (BaaS), while the fintechs harness the banks’ charter capabilities with their shiny innovation. As a result, community banks are no longer limited to serving their branch footprint and, thanks to technology, have expanded their reach. The BaaS segment is one of the hottest markets around, with projections for it to balloon to $74.5 billion by the next decade.

Of course, there are challenges that are bound to arise from the combination of these two very different entities. Both sides continue to learn and must reach compromises to continue working together. At the recent Canapi Alliance Summit in new York, hosted by VC firm Canapi Ventures, banks and fintechs shared panel discussions on the path forward for partnerships.

Some of the takeaways were that financial institutions must realize that fintech startups don’t have as long of an operating history under the belt and, therefore, shouldn’t be expected to “behave like established vendors.” This understanding should be reflected in how banks approach their onboarding and procurement processes for fintechs.

Meanwhile, fintechs, which are used to moving fast and breaking things, have to realize that banking is an industry that is rooted in tradition and heavy regulatory oversight. Therefore, they can’t expect banks to move at the speed and agility to which they are accustomed.

Michael Hsu, acting Comptroller of the Currency, is cited by Reuters as saying bank and fintech partnerships are “here to stay,” adding that they are the future of financial services. However, Hsu also believes these pairings deserve more regulatory scrutiny because of the growing influence of fintechs and the level of complexity they bring to bear.

As more of these partnerships emerge, he believes it’s getting more difficult to decipher which party is doing what, a phenomenon that has been complicated by additional layers of third-party service providers that the fintechs rely upon for things like IT, compliance, etc. Without greater oversight, Hsu worries that bank/fintech partnerships could spiral out of control, leading to a “severe problem” or worse in the industry.

As regulators attempt to get a grip on the changing financial services landscape, banks and fintechs do not seem to be missing a beat as theycontinue to take new ground.