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Banking Relations

Banks More Open About Fintech Coziness

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July 26, 2017

Banks More Open about Fintech Coziness

The old desire to keep technology sources under wraps has faded as banks scramble for the tech they cannot build themselves. 

It wasn't too long ago that banks using client-facing third-party software would bury the provenance of that software behind closed doors. Not anymore, according to a report from consultancy Aite. With more banks putting more support behind fintech startups, banks are coming clean about these relationships. Not to mention that they want to in some instances highlight the partnerships, as fintechs now are enjoying the same wave of popularity that their peers in Silicon Valley are seeing.

The trend of keeping quiet about who built the technology was around for a long time, said Christine Barry, an analyst at Aite and co-author of the report, "Large Banks and Technology Buy-ing: An Evolving Mindset." "Working with vendors, the large banks never wanted the market to know that they were using vendor solutions. That wanted them to think they were building everything." But that's changing as fintechs today are outpacing more traditional providers and banks are eager to partner up and get ahead of the competition. This includes providing more funding and regulatory support. "Now you're starting see banks putting out press releases that they're partnering with fintechs." The report noted that those partnerships broadcast to the market include TD Bank and Moven; Union Bank and Lending Club; Regions Bank and Fundation; JP Morgan Chase and OnDeck and Santander and Kabbage.

Banks "are gravitating more toward buying than building," Ms. Barry added. And one contributing factor to this situation is that traditional players "aren't evolving as quickly as fintechs." Traditional providers, "actually have the same challenges as banks in terms of legacy systems" that are bogging them down, Ms. Barry said. Fintechs don't have the same challenges.

Other forces are driving fintech-bank togetherness. Since the financial crisis, banks have been under much more scrutiny and have been operating under a lot more rules and regulations. "New regulations and increased regulatory oversight have a negative impact on banks' IT spending and progress toward initiatives," write Ms. Barry and co-author Dave Albertazzi in their report. "In fact, over the last few years, increased focus and spending on compliance have crippled many institutions, especially large ones, monopolizing a much larger share of their IT budgets than ever before and therefore forcing them to prioritize their initiatives and preventing them from moving forward with planned initiatives. Ultimately, increased regulation has had a negative impact on innovation and banks' ability to launch new products and services."

Fintechs can do it easier and probably cheaper. "Fintechs are expanding the definition of cash management and payments and other capabilities they offer customers." And this in turn has "enabled banks to go beyond what they have offered in the past."

Looking ahead, banks are eager to create "application programming interfaces" to better coordinate with fintech vendors. "The topic of APIs comes up in almost every conversation Aite Group analysts have with large banks," the Aite report noted. And "while few have made a great deal of progress, it is top of mind, and having an API strategy is viewed as being table stakes for future success."

All this change in technology will have a big impact on how banks buy technology going forward. They are going to have to be much more aware of how rapidly the tech changes so they can be on point when tech takes a new turn. To that end, Aite suggest banks looking to buy and/or partner should make sure they have a tech strategy that aligns with the business strategy, "look for technology providers committed to ongoing innovation," and be sure the bank's tech architecture "is sufficiently flexible to incorporate ongoing new technologies and remain nimble in technology choices."

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