Oct 26 2021

Money 20/20: Banks vs. Fintechs: Bitter Rivals or Collaborative Partners?

Traditional banks and fintechs may be frenemies, but when combined, they can drive organizations from all communities toward their goals.

For as long as there has been progress, there has been debate about old versus new. Whenever a new product or service is introduced, there are people who are apprehensive of the change, instead opting to stick with what they know. Time will tell whether an innovation is a flashy trend or a permanent transformation.

This has been the story of the financial industry. Traditional banks and credit unions have watched as fintechs have taken their legacy processes and services and transformed them for the digital age. Not all have lasted, but those that have survived have pushed traditional institutions to upgrade their services and experiences to accommodate evolving customer expectations.

Customers value both kinds of organizations: They often turn to banks and credit unions for things like home loans and retirement accounts, while they turn to fintechs for convenience and many daily tasks. But within the industry, a rivalry has developed between the two as they vie for customer’s business. 

Despite the competition, banks and fintechs are intrinsically connected. This complicated relationship was a key theme throughout this year’s Money 20/20 conference, exploring the ways in which banks and fintechs battle and complement each other. From racing to innovation to collaborating for the greater good, financial services stand to gain from both sides of the coin.

Who Is Driving Innovation in Financial Services?

“Banks are a very critical and necessary part of the symbiotic relationship with fintechs. Banks are there to provide the operational and the regulatory backbone that is necessary to ensure success. But let’s not confuse things: Just because banks help fintechs innovate doesn’t mean that banks are innovative themselves.” 

These were part of the opening remarks given by Greg Lloyd, vice president for financial services and payments at Levvel, to kick off an Oxford-style satirical debate in a session titled “Banks vs. Fintechs: Who Is Most Innovative?” Lloyd was joined by DigiPli Chief Revenue Officer Stacy Bjornstad arguing on behalf of fintechs. On the side of traditional banks were SnapCheck CEO Ken Kruszka and Lieberman Financial Group CEO and founder Zoya Lieberman. The two sides exchanged lighthearted jabs while making the case that theirs was the side of true innovation.

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Kruszka argued that the first charge card, developed in the 1950s, gave way to our current purchasing system. 

“Charge cards naturally led to credit cards, the first being Bank AmeriCard from Bank of America,” he said. “We may not remember much about Bank AmeriCard today — now we know them better as Visa.”

“Most banks don’t even want to be a bank,” Bjornstad quipped, citing regulation and compliance challenges that they face. 

“Fintechs, on the other hand, can have the best of both worlds,” she added. “They get to differentiate, create new financial services.” Fintechs get to do this, she said, without the cost and red tape of becoming a full-fledged bank.

Lieberman countered that nothing in the financial services space is truly innovative because it’s built on processes and services that have been around for centuries. She argued that the difference lies in the responsibility that rests in the hands of banks.

“Fintechs have permission to fail. They can try and try again,” Lieberman said. “Banks, not so much. They have completely different responsibilities and ways of doing business. It’s like the older versus younger sibling — what is permitted for one isn’t permitted for another.”

“There’s no such thing as black and white, only shades of gray,” she said.

How Banks and Fintechs Can Collaborate for Good

While a friendly rivalry can encourage innovation, fintechs and traditional banks can boost their accomplishments by working together, particularly when it comes to serving communities that are historically unbanked or underbanked.

Lisa Mensah has seen this firsthand. In a session about collaboration in financial services, the president and CEO of Opportunity Finance Network said that many of the small businesses her organization works with have become wary of fintechs after getting rapid loans that ultimately hindered their growth.

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“Many of our members have seen the negative side of this,” Mensah said. “There is suspicion and caution and fear. They’ve seen the side that didn’t work.”

Mensah’s organization works with community development financial institutions (CDFIs), which often have different needs than traditional lenders. Many of the businesses Opportunity Finance Network works with need not only financing but also additional support and knowledge about what is available to them.

“We typically come to customers with not just the money, but with the services, with notices, with market help if they need it,” Mensah said. One business needed what Mensah referred to as “capital-plus.”

“They needed not just capital, but they needed to be called about the PPP. They needed to know there was a service. They needed the terms of their existing debt stretched,” she recalled. “It’s not just a number.”

Early-stage fintechs that want to partner with financial institutions such as CDFIs need to understand the mission of these organizations. That’s also true of fintechs that want to partner with big banks to grow their organizations.

“As you walk into a big bank, you have to understand its perspective and where it’s coming from,” said Maria Gotsch, president and CEO of Partnership Fund for New York City. “Acknowledge those things up front.”

Gotsch said that one mistake many young companies make is that they see their product through their eyes alone, instead of positioning it within the context of a prospective partner.

“What often gets lost is, why should anyone else but them care about the product?” she said. “Your potential customer or partner is only going to care about what you’re doing if it’s solving a problem for them.”

Partnering with the right organization can not only help banks and fintechs grow, but also can lead to positive outcomes in communities. The financial services siblings may have a healthy competition, but they are most successful when they work hand in hand.

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