How Banks and Fintech Will Drive a Payments Transformation

November 12, 2019

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Welcome to the age of disruption. From retail to groceries to transportation, it seems every industry is ready to be turned upside down by technology that has ushered in new ways of serving customers and predicting trends.

The financial sector has seen its share of these heightened expectations. Enter fintech—companies that have brought predictive analytics, AI, and mobile applications to the world of banking.

This disruption will inform how the next generation of payment systems develops, and partnerships are a useful tool when billion-dollar traditional banks want the innovation provided by cutting-edge startups.

Banks Have Noticed, and They’re Buying

U.S. banks that want fintech of their own are willing to pay top dollar for it. As of September of this year, there have been two dozen equity deals, a similar rate to 2018, which marked a 180 percent jump over the year before.

And where are they putting their money? Payments and settlements. J.P. Morgan has been on a shopping spree, acquiring several related companies, including medical payments technology firm InstaMed for more than $500 million. It also created its own brokerage app, YouInvest.

Both Have Something to Offer

Large, legacy financial institutions and their more limber startup counterparts are finding many reasons why it makes sense to work together:

  • Speed. Startups are smaller and faster than big banks. They can see disruption coming and help their larger partners to stay ahead of it.
  • Scale. Traditional banks and investment firms have much larger coffers from which to make potentially innovative moves in the industry, including idea incubators, investment funds, and mergers and acquisitions.
  • Expertise. Fintech firms are the idea generators, but they’re newer and learning the ropes as they go. Legacy institutions may be slower to change, but they have decades of regulatory experience at the ready to help clear a path for innovation.

Fannie Mae and Plaid: A Match Made in Mortgages

Applying for a mortgage can be a long, painful process. After nearly 80 years in the business, Fannie Mae decided to try and change that by striking up a partnership with Plaid, a Bay Area fintech startup. In 2017, they teamed up to bring some much-needed automation to asset verification in the mortgage process.

Historically, mortgages involve a lot of paper, all to prove a potential homeowner has the funds to pay over time. With Plaid’s code, Fannie Mae connects directly with bank accounts to see in real time what resources a borrower may have available. Plaid puts borrowers in the driver’s seat—they can give permission to anyone who wants access, approve any data request, and see a complete history of who has seen what.

This collaboration has cut as much as 10 days off of average closing timelines.

Security and Risk Management

Although they’re in the same industry, fintech startups and banks often don’t speak the same language. This is particularly true when it comes to such thorny issues as risk, regulation, and security. But in this communication gap lies an opportunity for further collaboration.

If there’s one thing legacy banks do very well, it’s understanding and managing risk. This is one of the reasons they’ve historically been so slow to adopt new technology that hasn’t undergone exhaustive testing, by which point it’s often outdated.

Small fintech firms operate on the other end of the scale—they thrive on moving fast and getting there first, even if the end result hasn’t been thoroughly tested or proven. When combined with the steady hand (and vast resources) of a legacy bank, this frenetic creative energy can be harnessed and directed in a more productive direction.

This partnership can be particularly effective around issues of regulation and security. Large firms have the relationships and decades of experience to be able to navigate the complex financial regulatory system. Startups, on the other hand, are accustomed to a more fluid philosophy of security, with updates being made to software on a daily or hourly basis, rather than the old system of quarterly or even annually.

Disruption Gets Results

When banks bring their brand recognition, industry knowledge, and massive customer base to fintech’s disruptive technologies and agility, the results can be astounding. And the payment space is ripe for a revolution.

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