3 Experts' Insights on the Complicated Relationship between Fintechs and Banks

Banking | Zoya Lieberman, CTP |
15 November 2022

You’d think banks and fintechs are constantly at each other’s throats to climb to the top of the financial mountain, right? Sure, sometimes there are tensions between the two parties. Throughout the eventful history of finance, companies have been constantly striving for ways to obtain a leg up on their competition. One thing began to be clear: for anyone to succeed, differences must be put aside, and partnerships must sprout and grow.

So how have all these businesses been able to adapt without stepping over each other? While financial technology’s growth continues, it's understood that if any party is to succeed, there is no choice but to work together with the others.

However, working together doesn’t always go perfectly, and partnerships sometimes collapse. But that isn’t to say that fintechs and banks can’t get along—in fact, they need to get along.

To discuss this complicated relationship—and how banks and fintechs can move forward—Endava’s Zoya Lieberman recently moderated a panel at FintechSouth.

Panelists included:

Drago Dzerve, the Senior Vice President of Business Development at Bank of America
James Ray, CEO and Chief Growth Officer of GoDo Fintech LTD
Fred Fuller, SVP, Retail Banking at Endava

In this post, we’ll take a closer look at the panel’s conversation and examine key points of view on fintech/bank partnerships, power dynamics, and what happens when things go wrong and why.

WHAT DRIVES BANKING INNOVATION TODAY?

To start the conversation, we posed the question: What drives innovation in banking today? Is it fintechs like GoDo, banks like Bank of America, or perhaps some other outlier? The biggest socioeconomic factor for innovation in recent memory is the COVID-19 pandemic. Lockdowns across the globe forced banks and fintechs to ensure they could provide a digital banking experience from the safety of a customer’s home.

Lieberman asked the panelists their thoughts on what ultimately ignites the fire of innovation.
And according to Ray of GoDo, convenience and those socioeconomic factors come into play.
“We exist in a convenience economy,” the CEO of GoDo said, “and the same holds for payments and finance…Some socioeconomic factors accelerate innovation, but it’s not easy.”
Ultimately, innovation comes when it's least expected. When the need for new technology arises, that’s when new ideas are formed, according to Endava’s Fuller.

“Necessity is the mother of innovation,” Fuller said. “People love to think they’re creative enough to think of the next ‘big thing’ or something that truly doesn’t exist yet, but we’re really not. That level of innovation is truly rare, and often doesn’t get rewarded.”

Then again, does the average customer know what future enhancements to banking they need? Not always, according to Dzerve of Bank of America.

“True innovation is showing people something they didn’t know that they wanted,” the Senior Vice President of Bank of America said. “[Fintechs] like James come in and create the ‘Venmos’ of the world to rattle the status quo, and then [banks] create ‘Zelle.’”

NAVIGATING REGULATIONS AMID INNOVATION

Now that the sources for financial innovation have been examined, where does regulation come in? Lieberman set the stage for this conversation asking the panelists their thoughts.
“Without regulation, it would be chaos,” Dzerve said. “Banks protect the weakest, and that is partly thanks to the boring regulations and the securities they provide.”

Luckily for fintechs, innovation comes without any red tape. It’s easy for them to focus on new ideas and technology when regulations don’t come into play. Banks have to deal with a number of regulations like Reg E, C, D, and repeals of Reg Q, as well as consequences of Dodd-Frank Act and stipulations of Basel III, among numerous other regulations.

“It’s very easy to say that banks are boring,” Fuller said. “However, regulation and compliance become important when something goes wrong.” When suspicion of fraud appears on your account, you’d certainly hope your bank is there when you need it.

Ray inquired how the industry ensures it is evenly applied across the board.

“Eighty million people are underbanked or unbanked,” the CEO of GoDo said. “These individuals still need banking-related services, so they resort to things like payday lenders, who are notoriously predatory.” He also remarked that typical modern banks aren’t able to do what payday lenders do because of regulations.

“It’s important to clarify that banks protect the weakest of their customer base; not the weakest of society as a whole,” Ray concluded.

HOW BANKS AND FINTECHS CAN WORK TOGETHER

When regulations are all set in place and followed, partnerships between organizations can begin. However, it’s always a possibility that at least one party involved never reaches the level of satisfaction they intended. For partnerships to work, Ray understands that each side has two different parts to play.

“Banks have a purpose,” Ray said, “and it’s not necessarily to improve other people's lives. [GoDo] exists to do the opposite: to improve lives by helping people escape the cycle of debt and get on a path to financial health…Banks restrain when and where needed, while fintechs pull banks incrementally ahead.” He continued to remark that if either side stretches their pull too far, then that’s where partnerships begin to fail.

To prevent failures as mentioned above, Lieberman challenged the panel to show how fintechs and banks manage their partnerships.

“Assessment [of the partnership] should be ongoing,” Dzerve added, “and if it stops working…move on respectfully.”

It’s always tough to try to predict when, why and how a partnership goes wrong. The trick is to find the best way to manage. Is it possible to anticipate issues or is it more likely for organizations to adapt via lessons learned?

“You must do your homework before you sign anything,” Dzerve said. “In my experience, when a fintech gives you a contract with their own language and is rigid in the contracting process, refuses to negotiate, etc., I will pass on that relationship.”

Fuller added, “As a consultant, if something isn’t going well, I typically just stop hearing from the other party… it reinforced my opinion that you need to treat everyone with respect…You must approach each relationship from a true partnership perspective because you never know when the dynamic will shift.”

FINDING ALIGNMENT FOR PARTNERSHIP SUCCESS

The key to developing solid partnerships between banks and fintechs comes down to one word: “mission.”

“The two organizations have to be mission-aligned,” Ray said. “The mission isn’t just about the money; [each party] should have the same morals, outlook, etc.”

One cannot exist without the other. For fintechs and banks to prosper, innovate, and drive the financial industry forward, both sides must be on the same page. Now there is outside competition like Apple and Google threatening their hold on the market. With clear communication and a finely tuned mission, banks and fintechs will continue to innovate and improve the daily lives of businesses and customers.

If you are a consumer or business, you’ll have to be aware of what goes on behind the scenes. Imagine if fintechs and banks remained apart, and your bank uses outdated technology—then what?

“Fintech and banks need each other,” Fuller concluded.

Indeed, they do. If this enigmatic relationship between fintechs and banks crumbles, what happens next? As partnerships evolve, organizations focused on aligning their missions are most likely to emerge successful in navigating the complicated relationship between fintechs and banks.

To learn more about the latest industry trends, download our 2022 global payments report.

Zoya Lieberman, CTP

SENIOR INDUSTRY CONSULTANT

Zoya has 20+ years of experience in the business and commercial banking space. Zoya’s responsibilities are focused on strategic initiatives and knowledge deepening within payments ecosystems, treasury management, global trade, merchant services, credit & stored value cards, and commercial liquidity space. Zoya has deep subject matter expertise in both traditional and alternative banking solutions, including payables, receivable, digital banking, user experiences and competitive market intelligence. Zoya has dedicated her professional time to public speaking at industry events, forum & panel discussion moderating, and thought leadership.

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