With the top strategic priority in banking transformation continuing to be to improve the digital banking experience of current and prospective customers, there is an increased focus on efficiently opening and onboarding new relationships, deploying data-driven personalized communication, and creating new digital banking products and services. According to a recent report from the Federal Reserve, these third-party partnerships can take on several forms, including:
- Operational technology partnerships. Banking organizations deploy third-party technology to existing processes or infrastructures to improve efficiency and effectiveness. These arrangements can involve several third-party partners to transform processes such as new account opening or loan origination. The adoption of operational technology partnerships may also require new types of expertise.
- Customer-oriented partnerships. Financial institutions collaborate with third-party firms to enhance various customer-facing aspects of their business, with the banks or credit unions continuing to interact directly with their customers. Examples include online account opening tools, goal-based savings applications, applications to simplify person-to-person (P2P) money movement and enhancements to existing mobile banking platforms. Customer-oriented partnerships can also improve agility in serving customers.
- Front-end banking partnerships. A bank’s infrastructure is combined with technology developed by a fintech or other third-party provider, with the partner organization interacting directly with the end customer in the delivery of banking products and services. This form of partnership is far less common, but occurring more frequently as organizations increasingly test banking-as-a-service (BaaS) options in the marketplace. These partnerships offer the opportunity to reach new or broader customer segments than the bank may be able to reach through established channels.
New research, 2023 Retail Banking Trends and Priorities, sponsored by Q2, found that 60% of financial institutions are already meeting the digital banking needs of customers through collaboration with fintech firms and other third-party solution providers. These collaborations are increasing the speed and scale of innovation, resetting business models and making traditional financial services organizations more future-ready. The progress made over the past two years varies widely based on the asset size of institutions, with the largest and smallest organizations showing the greatest willingness to collaborate with outside firms.
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Third-Party Collaboration Objectives Vary
Consumers want financial institution partners that can simplify their lives in a manner that is both personalized and seamless. The fewer steps it takes to achieve any objective, the better. With customers aware of what is possible with modern technology, they are increasingly diversifying relationships among organizations that can provide the best experience for their unique needs.
Many banks and credit unions have found it difficult to deliver a consumer experience that replicates those offered by fintech and big tech firms due to the presence of product and data silos, outdated infrastructure, and a risk-averse culture. This has created an opportunity for partnering with startups and other third-party solution providers that can leverage data, modern technology and an agile mindset to assist legacy financial institutions in delivering enhanced experiences.
When global financial institution executives were asked about the areas where third-party partnerships are occurring, the most frequent solutions revolved around digital account opening and onboarding (55%) as well as digital lending solutions (37%). This is not surprising, since the friction in traditional relationship initiation processes is so prevalent and because the rewards for improving these processes are so dramatic. In other research conducted by the Digital Banking Report, it was found that there is an abandonment rate as high as 60% for new checking and loan relationship creation processes where simplified digital processes are not deployed.
It is important that financial institutions globally are also looking to collaborate with third-party solution providers for leveraging data and analytics for improved marketing communication and recommendations (31%). More than ever, consumers want to be proactively notified of opportunities for financial improvement on a real-time basis that is only possible with modern technology and AI solutions.
Though each partnership or collaboration presents its own opportunities and challenges, an organization’s commitment to innovation is an important foundation for growth and success. Banks and credit unions must understand the objectives of the potential collaboration, with a solid buy-in from senior management and division leaders. Ultimately, legacy financial institutions must try to eliminate outdated bank processes and ensure that information can flow across systems in real time.
Integration of Third-Party and Core Solutions
Players across the entire financial services spectrum continue to debate what the banking ecosystem of the future will look like. The majority of financial services leaders responding to the research believe that some sort of partnerships or collaborations will be needed to move forward successfully. The question is, how should fintech and third-party solutions be integrated with existing core provider capabilities?
When global financial services executives were asked about the ways they are modernizing their technology and digital banking capabilities, only 18% stated they were using their core system providers exclusively. Conversely, 44% stated they utilized core providers for at least 75% of new technology deployments, with 38% relying on third-party or fintech collaborations whenever possible.
Despite the perception that core providers should be able to deliver all the needed modern digital solutions desired by traditional banking organizations, it is very tough to support so many specialized digital solutions that change so rapidly. The shift to platform-based business models and an ecosystem set-up provides banks with various opportunities, if they decide to enter into these collaborations.
The question becomes, what is the right model for an effective collaboration? As can be expected, there is not a single right answer. According to EY, important factors to consider include financial dependencies, brand and reputational aspects, responsibilities of each party, operational dependencies (e.g. level of integration versus separation) and the level of involvement from management. Key challenges for an effective collaboration include cultural gaps, getting the back-office “ready” for integration of new solutions and scaling from a technological perspective.
The Future of Collaborative Innovation
The increasing expectations of consumers, and the rapid digitization of banking, will continue to drive collaboration between fintech firms, incumbent financial institutions and third-party solutions providers, with the goal of expanding modern financial service customer offerings. As a result, we will see more collaborative relationships, against a context of continued change and innovation, replacing the traditional bilateral partnerships.
Turbocharging this collaborative innovation will be the increasing use of Application Programming Interfaces (APIs) that enable the sharing and co-creation of solutions between banks and third-party providers. These collaborations will enable banks, fintech firms and other non-traditional providers to explore alternative products, methods of service delivery, and even revenue models, while providing a vastly improved and seamless experience for the customer.