Digitalisation has wielded a heavy influence on many industries over the past two decades. It has provided entrepreneurial opportunities for small businesses and created new systems of innovation. The banking industry has long been one of the most traditional and conservative sectors in the economy, yet disruptive, technology-driven innovations and Internet-based solutions have given fintech companies more opportunity to enter the sector. These ongoing digital innovations could change the face of business for even the most traditional banks, essentially reshaping the entire sector.
Fintechs and digital banks will be in both direct competition and partnerships with one another
Digital banks have the freedom, and typically, the know-how to develop in-house expertise in some areas, making them direct competitors to fintech companies. At other times, they will probably choose to outsource certain aspects of their business to fintechs, thus becoming akin to partners. It is this rarity of competition and partnership between the two that can bring them together.
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However, it may not always be smooth sailing as digital banks will be able to access multiple fintech partners, which may create fierce competition. As they can develop their in-house expertise while also utilising the outsourced know-how from the fintechs of their choosing, it may not always be a two-way street.
Fostering collaboration between digital banks and fintech
In this era of digital banks, traditional models requiring everything to be built from the ground up without any outside help will be largely unfeasible. Delegating certain expert tasks to third parties will allow both traditional-style banking and its digital counterpart to evolve simultaneously. The best way to achieve this is through an open banking platform. Third-party services, or fintechs, can integrate into digital banking platforms allowing greater flexibility and service for the consumer.
To put it simply, it is similar to the ecosystem of Apple and Android’s app store developers. Fintechs and digital banks can co-exist to provide a holistic banking experience for customers by covering all sides of the industry. Currently, examples include origination and lending platforms, omnichannel merchant platforms, and cloud services with cybersecurity and IT infrastructure requirements.
In partnerships between digital banks and fintechs, it is a win-win situation
With the rise of new digital banks comes an almost parallel increase in regulation. While there is a need for digitalisation, doing so in the banking sector will require heavily monitored laws and regulations to ensure that the customer’s interests are safe and secure.
Neobanks offer online-only traditional banking solutions to customers removing the need for a physical branch.
This online version of the traditional style has given governing bodies and regulators the need to develop new legislation frameworks. Since physical banks are typically trusted, many may be wary of switching over from their traditional teller service to an all-online model. For digital banks, gaining that same level of trust may take some time. To reassure and gain customers’ confidence, laws must be put in place to protect those that bank there. Regulations, including banking licenses for digitally based banking, may slow or restrict growth for some startups on their way towards the top.
A report in Oliver Wyman states that for digital banking companies to get the license they need to operate, they will need to provide proof of expertise in several industries. The report states that these requirements will need to “further financial inclusion, technological innovation, customer analytics, and a solid understanding of banking risk management and compliance.”
Fintechs are currently not a party to the same rules and regulations that digital banks may face as they evolve. This freedom from stricter rules gives them an advantage since their growth is not likely to be stifled in the same way that a digital bank growth might experience. They can continue innovation without the same set of digital banking regulation boundaries.
Jenfi will be positioned favourably in this new future of digital banks and fintech dynamics
The fintech startup Jenfi, provides financing options to the same demographic as many online banking providers, focusing on the same market share. This, however, does not mean that they cannot become a complementary aspect of digital banking. The potential partnerships between Jenfi and digital banks could lead to underwriting collaborations in specific market segments such as eCommerce, online business, and the analysis of ROI (return on investment) of productive spending and investments.
Globally, there has been an increase in tech-savvy individuals as internet penetration rates hit an all-time high. In conjunction with businesses digitalising, this rise in online consumption drives the demand and need for tech-driven financial services. When it comes to managing their finances, many more people have adopted the latest innovations as they realise how it helps create a better financial future for them. Increasingly, consumers understand that managing their money, and embracing digital finance platforms is the way forward. It has become commonplace for many who previously only believed in the traditional banking style. Convenient and easy-to-use apps and websites are paramount for customers, and with the co-mingling of fintech and digital banking systems, those two factors combine.
The way people manage their money and interact with financial services has changed drastically in the last decade. The evolution of banking and the resulting increased financial control for customers highlight the benefits of a partnership model for fintech and digital banking. When they can work hand-in-hand, the customer and the companies can utilise new technologies with ease, offering a win-win situation to everyone involved. These partnerships will continue to shape the future of banking in 2021 and in the decade to follow as fintechs and digital banking continuously adapt and innovate on how the financial sector operates at a consumer and business level.
This article was contributed by Jeffrey Liu, co-founder and CEO of Jenfi
About the author
Jeffrey is one half of the dynamic duo who started Jenfi, a financial technology company that provides revenue-based financing to rapidly growing businesses in Asia. Jenfi aims to assist digitally-enabled businesses, such as e-Commerce ventures and high growth startups, to accelerate their sales velocity by funding their marketing, inventory, and growth campaigns.
Jeff brings a strong operational and financial background from GuavaPass where he served as the Co-founder & CEO. Prior to that, he helmed the role of Head of Corporate Development at BeachMint, a venture-backed social e-commerce company in Santa Monica (founded by the Co-founder of MySpace). During his time there, he ran the company’s Business Intelligence and Analytics divisions where he forefronted the merger between BeachMint and Lucky Magazine, a Conde Nast subsidiary, forming The Lucky Group.
Prior to this, he helped launch a hedge fund in Singapore; worked as an investment associate at credit and special opportunities hedge fund in Chicago; and as an investment banker at Lehman Brothers. Jeffrey graduated with an MBA from the University of Chicago Booth School of Business and received a BS in Industrial Engineering with an additional major in Economics at Northwestern University.