Fintech-bank collaboration: the future of an expanded payments ecosystem

By Andrej Eichler, managing director, SIX Payment Services

The payment ecosystem is in a state of transformation, with new fintech organisations entering the market continuously while traditional banking and payment institutions are working to adapt to the realities of advanced technology and increasing consumer demands. But the days when traditional banks viewed fintech firms as competitors are gone. The industry has entered into collaboration mode, in order to leverage each other’s strengths and focus on building a path to long-term growth, together.

Banks have become working partners and are establishing relationships with fintech firms to enhance their own payment platforms and deepen or expand their value chain. They do this to secure profitability, establish new revenue streams, and boost their customer appeal.

With the advent of Open Banking, it stands to reason that banks and fintechs would want to capitalise on their particular expertise and deliver a holistic and tech-driven customer proposition. After all, the entire premise of Open Banking is to encourage collaboration and innovation in the marketplace.

Consumers seem to embrace the opportunities fintech innovation presents, but of course retail banking is renowned for its “stickiness”. Hence, traditional banks are looking to engage with those fintechs that best suit their business models.

IoT and the necessary investments to make it happen

As internet of things (IoT) applications become more sophisticated and widespread, an ever-increasing volume of payment transactions will need to be processed. Consumers’ watches, bracelets, cars and household goods will all be payment-enabled in the coming years, which will no doubt mean a huge increase in the volume and value of payments that will need to be made securely and reliably in real time.

This is an enormous opportunity for the fintech sector. Each of these types of objects – watches, bracelets and fridges etc – and each of the manufacturers which make and distribute them, will either need to develop their own payment system or partner with a fintech organisation or bank. Major fintech providers are ready to provide the backbone to enable these payments.

For most companies, rather than starting from scratch, the solution is to build partnerships with fintech providers who have developed robust solutions on application programming interfaces (APIs), enabling an enhanced payment experience using digital technology.

There are challenges to overcome in this new payment environment. For example, whereas a large retailer may plan a new payment system including e-wallets with loyalty schemes etc. six or more months ahead of time, a watchmaker may aim to deliver this in three months or less. The demands are different, people work at a different pace and the entire payments market must adapt to these new demands by creating an agile and flexible working environment.

Open technology

Each major European bank will have different technological needs for their payment wallets but with a strong application programming interface, this is relatively straightforward to achieve. Fintech suppliers have the capacity to scale their products to multiple clients.

The successful fintech model will be founded on investment in a solid API, which can handle the demands of the wallet systems of today and well into the future. Banks and other companies seeking to partner with fintech suppliers should look for those who have pre-invested in this future so that they have a broad basis on which to grow for years to come.

This approach has already been rewarded by high demand for European fintech services, proving that companies who prepared intelligently have judged the market correctly and are the right fit for the partnerships which will emerge in future between fintech and non-financial organisations. Fintech businesses will not typically seek to enter the banking space themselves (they don’t want to compete with their customers) but instead will be ready to partner with everyone from automotive companies to banks and high street retailers.

Harnessing consumer data

With growing concerns over global corporations’ use of individual customers’ data, European banks, retailers and other businesses are turning to non-bank alternative fintech companies to provide innovative payment systems such as mobile wallets.

This stems from a wish to keep data in Europe rather than have it transferred around the world and be used in ways that customers are less able to trust. European FinTech providers can assure customers that their data will stay within Europe and be subject to the strict rules that govern data accumulation and storage.

There are also many initiatives taking place to prevent data from leaving the continent and flowing internationally. Banks have spent many years earning the trust of their customers and in return, consumers enjoy the security and confidence of staying within a bank’s system and not dealing with GooglePay, for example. This inherent bank-customer relationship is built on trust and comes with the confidence that banks will protect and respect their customers’ privacy.

Do consumers still trust banks?

Across Europe, the majority of banking customers trust their banks to make electronic payments via virtual wallets provided from their banks more than the virtual wallets provided from their mobile phones manufacturer. This is interesting, especially when it comes to the younger generations, that are known for liberally sharing their personal information across a variety of social media channels. And it is a chance that – still – exists for banks.

Customers of traditional banks are turning to their bank for these new digital services, so there is growing pressure on the banks to act and meet these demands. Soon, customers will not worry about the underlying technology of payments. In fact, the whole payment ecosystem will become so commoditised that customers will just ‘tap and go’, unconcerned whether they were using AndroidPay or ApplePay or any other technology. As long as they are given a seamless payment experience, they will be happy with their primary contract.

The partnerships that have formed between fintech suppliers and their partners, both in terms of wallet development together with retailers or with banks, and with other technology firms such as fraud detection firms are designed to provide customers with a better and seamless experience.

The major European payments service providers handle millions of financial transactions every day that consumers make via retailers, hotels, ATMs and e-commerce merchants, so the smooth operation of the continent’s future commercial life will depend and rely upon a growing cooperation between fintech and banking partners.

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