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The Future of Fintech & Bank Relationships

Written by: 
Richard C. Fay, CPA

For decades, fintech companies have enhanced their offerings and diversified their products in the hopes of prying away market share from traditional financial services providers. This constant state of competition—with both industries competing for the same audience and clients—has shaped the nature of the relationship. But recently, things have started to change.

Earlier this year, the massive fintech company Lending Club acquired the small Boston-based Radius Bank, which has about $1.4B in assets. This marks one of the only times in United States history that a fintech acquired a bank—and the benefits of the transaction are stark.

“This is a transformational transaction that allows us to reimagine banking in a way that is free from legacy practices and systems. We will create a category-defining experience for our members that will dramatically enhance the resilience and earnings trajectory of our business,” said LendingCorp Chief Executive Scott Sanborn in a press release. “Adding the capabilities of a bank charter to the LendingClub mix really changes the game both in terms of what we can do for our customers and what we can do for shareholders.”

This transaction allows LendingClub to:

  • Significantly lower their costs of funds, letting them compete with larger banks whereas before, they were priced out
  • Issue new products, including checking accounts
  • Deliver an integrated banking experience
  • Enable customers to spend less when borrowing and earn more when saving
  • Grow in the market
  • Diversify earnings
  • Enhance resilience
  • Serve members more effectively

This acquisition has shown that instead of focusing on outmaneuvering each other, fintech companies and financial institutions can actually benefit from one another—taking advantage of the services and offerings that each bring to the table. As more and more businesses have started realizing these benefits, the relationships between the two have begun developing and migrating from one of competition, to one of partnership.

How Can They Help Each Other?

Fintechs and financial institutions are realizing that each has various gaps in their service offerings, abilities, and resources that the other can fill.

How can a fintech help a financial institution?

  • Legacy systems are hard to modify
    • Fintechs can streamline historically manual processes, including enhancing the application process and offering face-to-face meetings virtually
  • Provide access to previously unattainable customers
  • Scrub large amounts of data to better service existing customers
  • Interpret large amounts of regulatory matters for implementation

How can a financial institution help a fintech?

  • Banks have capital, where fintechs may not
  • Banks understand customer frustrations and where improvements may lie
  • Banks understand the markets in which they operate and potential opportunities
  • Banks know their significant costs and where savings are attainable

A Migratory Event

According to Cornerstone Advisors, 65% of banks and 76% of credit unions said fintech partnerships would be important to their business strategies. This same study found that digital account opening is a top fintech partnership priority, and financial institutions are now placing more emphasis on finding partnerships in order to offer new banking products.

Looking Forward

Embracing these new partnerships can be difficult, with some banks and credit unions being unaware of the best strategies to begin investing in fintech. However, as this relationship evolves, financial institutions should continue to think innovatively by:

  • Hiring tech experts
  • Developing programs to generate new technology
  • Becoming involved in the fintech ecosystem
  • Partnering with innovation labs

As for fintechs, their entry into the market has led to significant innovation and product development. Working with a bank or credit union and obtaining additional institutional knowledge could be what sets the company apart from the competition.

Conclusion

The acquisition of Radius Bank by LendingClub is a wake-up call of sorts. Banks have held off fintech challenges through their competitive advantage of deposit gathering, and resulting low cost of funds. This acquisition has effectively leveled the playing field between a fintech and their financial institution competition. The time to innovate is now.