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The Relationship Between Fintech, Regulators, and Traditional Banks

Part 1 – Fintech and Bank Relationship

In the past, traditional banks viewed Fintech companies with suspicion and concern for their market position. However, today their stance has changed and traditional banks consider Fintech companies as valuable partners in the financial services sector. Traditional banks have identified Fintech companies as a source for reaching new goals, interacting with customers, and building a brand.

The nature of Fintech companies is to scale as fast as possible but their small size and relatively limited experience in the industry can prove to be a constraint when going up against traditional banks with huge balance sheets and hundreds of years of history.

The view of the relationship between traditional banks and fintech companies has changed over the years, and today this relationship is understood to be essential to  the future of financial services. The growth of these relationships relies upon the fact that the trust of the average customer in financial institutions has degraded over time and is now at a low point. Many studies support this perception: for example, only 14% of people reported turning  to their bank when they needed assistance or advice following a life event that affected their financial situation. Moreover, the overall confidence level in banks has fallen tremendously from 53% before the 2008 financial crisis to 32% in 2019. It is quite evident  that customers have lost their trust in  banks, and no longer regard them as a helpful expert who can help. 

On the other hand, Fintech has received a generally positive response from the public with people believing that these companies have a positive impact on the financial services industry. Even though both traditional banks and Fintech do the same things, the difference in trust is big enough to change the landscape of the industry. 

The difference comes from the fact that Fintech companies provide a personalised approach to customers, and because of their tech-savvy nature, the user experience is easier to navigate and understand. For example, Fintech company PayPugs arranges a call with every customer to understand their frustrations and to provide the most suitable solution.

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How does the relationship work?

Now that we understand the underlying problem, we can seek the potential benefits and grounds on relationships between banks and Fintech. When banks and Fintech partner up, they can harness recent changes in behavior and capitalise on higher levels of trust people have in tech to provide financial services that effectively engage with customers.

Building brand reputation

Most of the traditional banks have been around for years and are well-known by consumers. As we have seen, though,Fintech companies have a reputation with the public for being more trustworthy. By partnering up, both institutions can benefit from each other’s status. A bank might benefit by gaining more trust and a Fintech company might benefit from gaining more reputation among the industry leaders by demonstrating their stable services.

Expansion and scale

As identified before, Fintech companies’ nature is to scale as fast as possible. This may prove difficult for banks as they would need to establish physical branches in the particular market. A Fintech-bank partnership would allow the Fintech company to access the ready-made financial services that banks have and offer them to their existing customers and new markets more easily because of the digital environment. The Fintech company benefits from acquiring the services and the bank can expand its revenue source faster and with less expense

Reduced costs and ease-of-use

Banks already have established financial services and other programmes in place. A partnership would allow Fintech companies to access these services without spending thousands on development costs. On the other hand, the bank can benefit from upgrading its existing processes. For example, on Revolut you can open an account in 24 clicks but on HSBC it takes almost 100 clicks. There is a learning curve that banks can benefit from. 

All successful bank-Fintech relationships require a give-and-take approach. For both parties, there is something that both can benefit from. Fintech companies might have ideas for financial services and they are looking for ready-made products or resources, while banks look to expand cost-effectively.

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Part 2 – Fintech and regulator relationship

Since the 2008 financial crisis, the regulators have been more active than ever since. Countless rules and regulations have been introduced and new regulatory bodies have been established. 

For example, The European Commission has established the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pensions Authority (EIOPA). The entities were established to provide more transparency and control over the financial market.

Today, financial regulators have identified the benefits of Fintech companies especially in difficult times such as Covid-19. The digital environment is one of the primary factors that has allowed regulators to introduce rules and regulations that favor Fintech companies. 

However, there is still a lot of work to be done as only 37% of regulators had taken at least one regulatory practice targeting the Fintech industry. While most institutions have identified the need of digitising financial services, Fintech companies should not be treated the same way as traditional financial institutions because of the unique nature of their business.

The overall outlook on the Fintech and regulator relationship still has a long way to go. ClassifyingFintech companies in the same group as traditional financial institutions will not enhance the rapid growth and digitisation of financial services. For example, 80% of regulators believe they have been resilient and adaptable in their response to the digitisation of financial services during Covid-19. There is a learning path for Fintech companies and regulators to explore and find common grounds for future growth.

PayPugs Chairman of the Supervisory Board, Alexander Zelinsky, commented on the relationship between regulators and Fintech companies: “I would say that the most important aspect would be advisory for Fintech companies willing to work in new markets. So far it’s understandable that a lot of regulators are trying the best of their abilities to support new applicants, but even so, sometimes there is a feeling that you are running around with a hat on fire and looking to solve your situation.”

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