Collaborating for win-wins is the increasingly preferred paradigm in financial services, especially after the Covid pandemic. With the pace of digitalisation increasing significantly, banks have been gravitating towards joint strategies, instead of competing with fintechs and other new-age service providers. Indeed, 48 per cent of banks surveyed by The Economist recently as part of its ‘Threat Assessment 2022’ report, said they had partnered with fintech start-ups in the past three years.
The objective is to stay competitive, ensure customer-centricity and financial inclusion by offering new and innovative services to customers, and take advantage of the latest technologies and innovations.
These partnerships are helping banks keep up with the fast pace of technological change in the financial services industry, and allowing them to leverage the strengths of their would-be competitors in areas of credit risk and data platforms, thereby offering a better customer experience.
Through open banking, banks are opening their application programming interfaces or APIs, allowing third-party developers and fintechs to access customer data and layer their own financial services, including payments, account management and financial advice. With the democratisation of the data, there is tangible shift towards adopting the right analytics for insights making this the new oil in this industry.
What’s more, banks are creating incubators and accelerators to identify and invest in promising fintech companies, which allows them to access the latest technology and services and to collaborate with startups on new products and services
All this is resonating well with customers too. In fact, customers — retail as well as corporate — are increasingly preferring banks that have strong client proposition brought about by extensive partnerships with fintechs.
It is imperative that banks consider the long-term potential of these partnerships and not rush headlong without a clear understanding of the specifics and possible challenges.
For one, partnerships can be challenging to maintain, and not all will be successful. Banks and other organisations will need to work closely and align on strategic goals, and there may be conflicts over data sharing, revenue sharing, and control over the customer experience.
Also, banks sharing customer data with third-party companies, can raise concerns about data privacy and security. Banks may face integration challenges as well when working with partners, as they may have different systems and processes. This could make it difficult to share data and offer joint services, which can negatively impact the customer experience.
At times, the strategic direction gets muddled when the products and solutions are looked at as processes and not as value generators.
Embracing the cultural change and upskilling the existing staff to adopt to the technology innovation will have to become integral part of this journey.
And of topmost concern is, banks getting associated with their partners’ reputation. It can harm the bank’s reputation as well, making it difficult to attract and retain customers.
Guardrails a must
Lessons have been learnt from unsuccessful partnerships. The imperatives for banks include establishing clear metrics for measuring the success of the partnership, such as customer engagement, revenue growth, and cost savings. Also, to be considered is whether the partnership will be able to scale up to meet the bank’s needs as it grows.
Banks should be prepared to be flexible and adapt to changing market conditions, too while at the same time adopt ethical practices. Lastly, banks should have an exit strategy in case the partnership is not successful or if the bank’s needs change.
The writer is Senior Director, CRISIL Market Intelligence and Analytics