Legacy banks and fintech companies often seem to be at odds with each other as both parties vie for a similar foothold in the market. Over the last decade, we’ve seen the rise of countless new fintech players pop up to address perceived needs and trends in the payments industry. For example, companies like Venmo have crossed into a territory that was previously only reserved for traditional institutions, but done so by offering a revolutionary new product for consumers.
Some banks have responded by pushing back and buying access to parts of the market that they once fully dominated. An example of this is the launch of Zelle in 2017, which provided an alternative to third-party P2P payments. Having the mindset of incorporating and buying up the competition is simply not sustainable, though.
Fintech innovation will continue to drive the lead in disruptive change. However, this doesn’t mean that established institutions will inevitably lose market share.
Each side of the coin offers unique services, leading many banks and fintech newcomers to choose partnership and collaboration, rather than competition. To stand out in a crowded industry, though, it’s important that institutions leverage the strengths they possess which fintech companies lack, and vice versa.
Fintech Companies Bring Innovation, But Lack Experience
Fintech companies are still relatively new to the industry, but they’ve tended to use their younger, fresher, and more cutting-edge image to their advantage.
Fintech upstarts relied on drawing a younger audience to their side, as well as appealing to traditionally unbanked populations. Many have gained impressive media attention because of it, as well as a loyal userbase. These fintech companies’ brands are built on the promise of innovation, and their technological offerings appear to be the wave of the future.
Additionally, their focus is often honed in on one specific financial offering, appealing to consumers looking for a specialized service. A narrow focus makes them vulnerable, though.
Since fintech companies don’t typically provide a “one-stop shop” for all financial needs, consumers are forced to use different providers for a variety of financial services. A user might have a different app—or even multiple different services—to make deposits, seek loans, manage investments, and plan for retirement.
With so many different providers, it becomes difficult for consumers to build a relationship or nurture trust with the people handling their money. They also don’t have the same kind of rapport that banks have built up over years of service. In many ways, fintech companies have yet to prove themselves to be reliable and long-lasting in the same way as legacy institutions.
Play to Your Strengths
Traditional banks remain the foundation of the payments space. As such, they conduct business with a totally different dynamic.
Legacy institutions offer trust, reputation, industry connections, and legitimacy. They have the advantage of strong existing relationships that have been in place for many years or even decades. The traditional banking system is also one that emphasizes the importance of in-person touchpoints and establishing meaningful relationships with customers.
It’s important for even these legacy institutions to keep pace with new developments in fintech. However, the key should not necessarily be to compete on the same level as many of these dynamic, fast-moving startups. Instead, established institutions should look for opportunities to increase efficiency and optimize internal processes to provide better experiences for customers.
Chargebacks, for instance, are one of the ways that the outdated legacy process can prove detrimental. Disputes have turned into a long, drawn-out procedure for every party involved. While this goes more into the realm of Visa and Mastercard, it’s still incumbent on FIs to push for change that delivers faster and more accurate resolutions to the chargeback problem.
Keeping up with fintech companies requires the kind of agility that is difficult to replicate. The good news, though, is that you don’t have to match them with the same technological pace.
Each Party Has a Role to Play
Established financial institutions and upstart fintech companies don’t necessarily have to be fierce competitors. By acknowledging that they both have strengths and vulnerabilities, each can play to what they do best. This allows for greater stability and strategic cooperation, while customers benefit from the best experience each organization can provide.
Fintech companies possesses agility, while legacy institutions remain the bedrock of the payments space. One can be the driver of disruptive change, while the other pushes for technological innovation at a more gradual and conservative pace.
Banks can increase efficiency and optimize their internal processes while maintaining strong relationships and the proven expertise of decades of experience. There is more to be gained from leaning into one’s strengths and focusing on tailoring a better experience for everyone.