FinTech companies have been the foundation of innovation in the payments and financial services sphere over the past decade, whilst legacy financial institutions, such as banks, have struggled to keep up. Generally considered in competition with one another, what would happen if FinTechs and Banks joined forces? Prabhat Vira, President of Tungsten Network Finance, explains.

Recent research shows that financial institutions are increasingly forming partnerships with fintechs to create products that streamline and improve the customer experience and eliminate inefficiencies. In fact, when questioned by PwC, 82% of banks, insurers and asset managers said they expected to increase the number of fintech providers they work with over the next 3-5 years. So what is driving this trend and how can commercial banks follow the lead of their retail counterparts?

A symbiotic relationship

Over the last few years, fintechs have evolved the customer experience – prioritising the user experience to connect with and empower customers with alternative finance. Many banks are coming to the realisation that if there is a great opportunity to participate in fintech developments.

In light of this, instead of competing with fintechs, some banks are seeing the wisdom of embracing the dynamic nature of fintechs and are actively collaborating with them. It is a very positive step forward as each party has something significant to offer the other. Fintechs require access to capital, and Banks in contras, are looking for ways to innovate more quickly, provide a slicker customer experience and leverage data to mitigate risk. Collaboration with fintechs enables banks to outsource their R&D to them and bring new products to the market much more quickly and for less cost. Ultimately, the partnerships between banks and fintechs are creating a unique opportunity for the expansion of finance solutions, and thereby adding real value for customers.

Commercial banks following retail counterparts

However, this subject is not purely theoretical for us – we have recently teamed up with BNP Paribas, a leading international bank, to offer e-invoicing linked Receivables Purchase and e-invoicing linked Supply Chain Finance (e-SCF) to large corporates in the USA and Canada. Our customers can now obtain an attractive working capital solution through the same technology provider they use for e-invoicing and procurement activities. It is the first partnership of its type and a sign that commercial banks are following the lead of their retail counterparts in collaborating with fintechs.

By linking e-invoicing with supply chain and receivables purchase, customers are offered a one-stop solution that brings together process efficiency and working capital optimisation in a single portal. They are offered attractive rates in a straight-forward, hassle-free way. From the bank’s perspective, a lot of energy can be spent connecting clients and on the payables side, on-boarding suppliers onto the system. This creates friction in the relationship, and inhibits the supply chain. The advantage for a bank and for the customer is that by partnering with a fintech like us, these trade flows are already on our platform. Therefore, both do not have to onboard suppliers twice and deal with complex technology integrations. Ultimately, the partnership helps to make the supply chain process smoother for all.

We believe partnerships such as this are shaping the future for businesses and financial institutions alike. They are enabling us to work more smartly and offer added value to customers. Speed to market is of the essence in our fast-paced, consumer-centric world and fintech providers are agile by nature and best placed to bring innovations to the masses. As retail and commercial banks realise the mutual benefits of partnering with fintechs, we are certain we will see more and more collaborations that will delight customers around the world.

How are banks meant to co-exist, work with or become the initiators of fast-developing fintech when most are so caught up in legacy systems? Below Finance Monthly benefits from expert insight from Kyle Ferguson, Chief Executive Officer at Fraedom, on the potential avenues banks could focus on in the pursuit of tech advancement and the maintenance of a competitive edge.

Legacy systems are seen to be the most common barrier preventing commercial banks from developing fintech applications in-house. That was a key finding of a recent survey conducted by Fraedom. The research that collected the thoughts of shareholders, middle manager and senior managers in commercial banks revealed that more than six out of ten (61%) of banks are being held back by this technological heritage.

The banking industry has historically found it difficult to make rapid technological advancements so in some cases it is unsurprising that older systems are holding them back. However, with this in mind, smaller fintech firms have already started to muscle their way in to help assist retail banks with providing a more comprehensive range of services to consumers.

Banks now have the option to negotiate the obstacle of legacy systems through partnering or outsourcing selected services to a fintech provider. Trusted fintech firms are offering banks the chance to reap the benefits from technical applications that can lead to more revenue making opportunities, without taking the large risk of banks taking the step into the unknown alone.

However, a shift does appear to be on the horizon with only 26% of commercial banks not outsourcing any services 41% of respondents globally stated that their bank currently outsources payment solutions to fintech partners. This was in comparison to 33% who say they do the same for commercial card management solutions and 26% who claim to do so for expense management solutions.

It was also interesting to note that banks are planning to ramp up their fintech investment over the next three years, with 77% of respondents in total believing that fintech investment in their bank would increase. This feeling was especially strong in the US where 82% of the sample stated this belief opposed to 72% of those based in the UK.

This transitionary period is great news for ambitious fintech firms. Banks are starting to realise that established fintech providers can make a big difference in areas of their business by providing technical expertise as well as in-depth knowledge of local markets.

It’s all about selecting key, digital-driven services that will help retain customers and entice new ones. The ability to offer card expenditure and balance transparency can reduce risk and costs for issuing banks. It is a service that can be joined on to an existing business with little overhead costs.

This is just one of several ways that partnering with fintech firms can bring substantial benefits. This increase in agility also helps banks to speed up service choices and improve customer satisfaction.

Forming a partnership can provide banks with a way around the issue of coping with legacy systems and avoid implementation costs. By forming a partnership, outsourcing banks buy in to a product roadmap that will keep their offerings ever relevant as fintechs develop the technology required.

The partnering approach is becoming more appealing to commercial banks. They understand their customers value their reliability, trustworthiness and strength of their brand. But increasingly, they also understand the importance of encouraging innovation to remain ahead of the technology curve, while recognising it is not the bread and butter of their business.

While legacy systems appear to be the most common factor in preventing banks from creating in-house fintech applications, the study did also reveal that a lack of expertise - recognised by 56% of respondents was also a major stumbling block.

To innovate and grow, banks and fintech firms alike must have employees that understand the technology – developers, systems architects and people with a record of solving problems. Taking a forward-thinking approach to recruitment is key.

If they want to attract and retain the best talent, organisations need to be listening, adapting and trusting each other to work together to resolve issues and frustrations. We believe all the above elements will become increasingly important in any successful business.

Overall, the research represents growing strength within the fintech sector and it is great to see that more banks are beginning to see the value in partnering with a fintech provider. In turn, this is delivering a better service for banks and customers alike and it is a trend that I expect to continue as banks fight to keep on the pulse of technology in the sector.

Legacy systems are preventing nearly two thirds (64%) of US commercial banks from developing Fintech applications, research commissioned by Fintech provider Fraedom has revealed.

Interestingly, 82% of the respondents that highlighted this concern were shareholders. Over half of those polled also noted a lack of expertise within banks as an important concern (56%), just ahead of limited resources (53%).

The study included decision-makers in commercial banks including shareholders and senior managers as well as middle managers.

Commercial banks outsourcing services to a Fintech provider is clearly a trend on the rise, with only 22% of US banks revealing that they do not outsource any payment services compared to 30% of their UK counterparts.

Kyle Ferguson, CEO, Fraedom, said: “This research highlights that legacy systems are standing in the way of US commercial banks developing Fintech applications. This in turn is resulting in certain services such as commercial card and expenses being outsourced by more than three quarters of banks. It is now recognised that Fintech firms can help banks overcome these technical issues and benefit from previously untapped revenue-making opportunities.”

The research also discovered a growing inclination among commercial banks to partner with Fintech firms. The main reason for this shift is to help bring new products to market faster, as recognised by 94% of respondents.

The second most popular reason given for partnering with a Fintech was that to attract ‘new customer segments’ supported by 82% of respondents, followed by 76% who said it was to help ‘differentiate themselves from competitors’.

“US banks are beginning to see the rewards of partnering with a Fintech provider, especially when helping to bring products to market faster.” Ferguson added: “Established Fintech firms can understand the technical challenges that banks are struggling to cope with in local markets and provide an easy yet very effective solution while often differentiating them from their customers.”

(Source: Fraedom)

Businesses have had to deal with a lot of change, and many have successfully embraced change to create whole new industries and many billions in new value. Yet other businesses literally vanished: Nearly 50% of the companies that were part of the Fortune 500 and FTSE 100 in 2000 no longer appear in those rankings today. Mark Nittler, VP Enterprise Strategy at Workday, here explains to Finance Monthly why technology shouldn’t be a barrier to change.

Some of these organisations were the result of the global merger and acquisition spree that has taken place over the last 30 years and continues today, and others fell victim to the financial crisis and Great Recession earlier this century. But many were simply overcome by the forces of digital disruption. In the face of technical evolution, their inaction allowed innovative start-ups and more agile competitors to win with newer, faster, and more-efficient ways of doing business.

With that in mind, it seems crazy that technology itself should be a barrier to change, but for many businesses that is precisely what happened and continues to happen today. Companies struggle because much of the technology they currently have in place to run their businesses was not designed to help them adapt and excel in this era of digital disruption.

It’s worth looking at how financial organisations have approached technology over the last 30 years. In my experience, the technology that was originally designed to automate transactions and financial accounting is now preventing finance from realising its ultimate goal: To be a better business partner.

When we think about the finance function today, it essentially has three main areas of responsibility: Transaction processing and accounting, compliance and control, and business partnership. Finance leaders are frustrated because their teams spend too much time dealing with the first two, leaving little time to be the strategic partners their companies truly need.

Achieving this vision of partnership requires finance to deliver data that goes way beyond the general ledger information that legacy systems were designed to record. With a wider set of stakeholders and a business landscape that is continually evolving, finance is being asked to provide the broader company with contextual information that can actively influence decision-making and, for the most part, they’re struggling in this mission.

If this vision is to be realised, then transformation must happen. Finance needs faster access to relevant data, better reporting, and stronger built-in internal controls. And because older financial systems were not created with this vision in mind, businesses and their legacy vendors have attempted to fill the void by bolting on missing capabilities. As a result, finance technology has become a complex mix of acquisitions, custom integrations, and middleware.

Despite seemingly perennial discussions around the need for finance to transform, this hasn’t really happened. Why? It’s primarily because legacy finance systems continue to stand in the way. They’ve stopped finance from mastering the elements of a true partnership: providing impactful business analytics, delivering clear plans and forecasts, and having the agility to adapt analyses, plans, and processes to business change.

Analytics that influence positive business outcomes stem from four traits that simply do not exist in legacy systems—a broad definition of the user, information relevance, simplicity, and availability on any device. Legacy ERP was designed in a command-and-control era, where information was delivered to a few who then communicated it to the masses. Today the audience for financial information is, quite literally, everyone.

This broad community is interested in analysis such as profitability, what-if-analysis, and cost model, but traditional ERP systems were built for IFRS/GAAP and regulatory output rather than delivery of contextual analysis. Finance teams have tried to tackle this lack of capability in their legacy ERP systems by looking for better reporting, achieved by bolting on aftermarket business intelligence or enterprise performance management reporting tools. But this approach hasn’t worked because the problem is not reporting—it’s the quality of the data and the ability to easily draw conclusions from analysis.

If the right data is not captured at the very beginning of the process at the transaction level, no reporting scheme will deliver relevant analysis. Modern systems, such as Workday address this issue at the transaction level by capturing data-rich transactions so that relevant analytics can be delivered directly from the system without the cost, complexity, maintenance, and control issues of aftermarket solutions.

Having the right data is the first step; making it usable is the next. Because we can no longer expect that everyone using the system is a back-office system expert, analytics have to be easy to define and understand and simple to access. And because everyone is mobile, relevant analytics must be available anywhere at any time and on any device. Such tools must be designed from the beginning for delivery on mobile devices as standard, not as an optional and a chargeable extra.

The days of static plans that last a year or more are gone, and to support the evolving needs of the business, planning must be an ongoing activity. And in order to be effective, planning and forecasting needs to be combined with transactions, controls, reporting, and analytics in a single system that offers a single source of truth, a single set of data, a single security model, a single control framework, a single set of processes, and a single user experience. Without this forward-looking approach, organisations run the risk of their plans becoming dated and redundant virtually as soon as they are produced.

That leads us to the third partnership attribute—agility. Legacy systems are inherently rigid, turning many otherwise very good finance departments into business prevention teams, because they’re unable to cause the change necessary to support new business initiatives. They need modern tools with the ability to change organisation structures, business processes, and even data models in minutes. Essentially, a finance system should be capable of converting a finance department into a change enablement partner to help the business rise to challenges and take advantage of opportunities, whatever they may be.

The journey to finance transformation isn’t easy, but it’s certainly doable. It requires an understanding of why previous efforts of failed, and reducing time spent on transaction processing. It also requires a rethink in terms of governance, compliance, and control, and how finance approaches this from a technology perspective. Finally, finance must become a more strategic business partner, by delivering insights from the right data, the ability to plan, and adapt to new opportunities as they arise. Only then can financial transformation take place.