Recently, I wrote about the lessons banks have learned, or should have learned, from fintechs.
A friend noted that the reverse is also true. After considering that, I remembered several instances where fintech firms that I have worked with or advised looked at banks for solutions.
Here is a list of seven lessons from traditional banks that fintech firms should heed. [Read the first article, “9 Lessons Banking Has (or Should Have) Learned from Fintechs.”]
Does the value outweigh the risk? The three key considerations for evaluating whether to invest in growing an internal program or exploring an outsourced solution.
Explore the transformative role of AI in the financial sector, uncovering insights on security, efficiency, and innovation for a future-proof financial landscape.
1. Understanding and adhering to regulatory requirements is crucial for long-term stability.
The tech startup ethos of “move fast and break things” is not a wise strategy when it comes to highly regulated industries such as health care or financial services. A myriad of examples shows what can happen to fintech firms that fail to adhere to regulation or “the spirit of a guidance.”
The good news for fintech firms is that a healthy number of bankers would still like to join fintech firms and bring along their regulatory knowledge. Of course, hiring compliance experts is not the only way to solve this situation. Firms can and should hire banking attorneys and compliance consultants to help them ensure compliance.
In 2023, the Securities and Exchange Commission fined Titan Global Capital Management USA “for allegedly misleading investors with hypothetical performance metrics in its advertising, the first violation of the agency’s amended marketing rule.”
I would find it hard to believe that Titan employed well-versed bankers and financial marketers who understood the rules.
2. Effectively managing risk, including credit and operational risk, is vital for sustainable growth.
Like compliance, risk management does not come naturally to tech startups. But if a tech firm expects to survive in financial services, it must apply risk management best practices that banks have honed.
For instance, banks have well-proven credit risk practices that keep them profitable. However, these practices tend to leave out people with “thin files,” or those that lack any credit history.
Fintech firms have popped up trying to solve that problem by defining new ways to determine creditworthiness that are not tied to a credit report or credit score. Investors have cut back on fintech investments, requiring fintech firms to become self-sufficient.
ZestMoney is a recent example of a high-flying fintech that misjudged both risk management and compliance. At its highest valuation, ZestMoney was worth $455 million and was the top buy now, pay later platform in India. The firm stopped doing business Dec. 7, 2023, due to credit issues, new regulatory requirements from the Reserve Bank of India, and a drought in venture capital funding. Unlike banks that use standard underwriting scores, ZestMoney was using its own algorithms that augmented the usual credit history with alternative data.
An example where a fintech has applied novel credit risk tools, specifically using artificial intelligence, and existing banking approaches, such as credit score, is Pagaya Technologies. A year ago, when the U.S. economy seemed headed into a nosedive, Reuters warned that Pagaya was going to see tough times as its focus has been primarily subprime consumers.
However, Pagaya’s third quarter 2023 results showed strong performance. A commentary on Seeking Alpha notes that the percentage of loans produced by Pagaya’s algorithm that default is lower than the banking industry’s own average.
3. Building and maintaining customer trust through robust security measures and transparent practices is essential.
Banking customers trust their banks to keep their funds safe. While there are always examples of banks failing to do so, most do an excellent job. Fintech customers will expect the same level of perceived security from new entrants.
The real lesson for fintech firms centers around the perception of security. After all, Capital One and JP Morgan had significant data breaches and yet they suffered minimal customer loss.
4. Planning for scalability and ensuring the sustainability of business models is key for long-term success.
This lesson is the story of how tech startups survive without selling out. Successful banks have perfected the art of scalability, sometimes taking shortcuts that result in future problems. Regardless, looking at how banks like Chase and Bank of America scaled up over decades into national players can help teach fintech firms how to scale and remain stable.
5. Having a reliable and scalable technological infrastructure is essential. Integrating with existing financial systems may be necessary.
This lesson may seem counterintuitive. Often, we talk about the technical debt that legacy banks must carry due to outdated infrastructure and legacy systems. However, the lesson is the understanding of how the banking industry has thrived even when systems are a limitation.
Also, some systems like core systems seem like a throwback. Neobanks quickly come to find that core systems are necessary. A bank-like experience cannot be managed on simple databases, no matter how robust those databases are.
6. Diversification of financial services can help meet the varied needs of a broad customer base.
SoFi is a notable example of this. Their initial offering of student loans to Ivy League students was not a viable direction for the organization to last long term. Their diversification and eventual positioning as a full-fledged bank have allowed SoFi to be an ongoing concern.
7. Partnering and collaborating with other industry players, including traditional banks, can open avenues for growth and innovation.
You may remember that this was in my list of lessons banks learned from fintech. This lesson cuts both ways. Collaboration by successful banks can translate to growth and sustainability for a fintech.
The story of Moven exemplifies the power of partnership and collaboration for growth. Moven was co-founded by banking futurist Brett King as a direct-to-consumer neobank.
Moven, together with Simple, led the way in U.S.-based neobanks in the early 2010s. Both organizations found growth to be a challenge. Simple sold to BBVA U.S. (which closed it and eventually sold out to PNC) while Moven chose the partnership route, pivoting to B2B-only service for banks capitalizing on their core competency in digital banking experiences.
Taking Banking Lessons to Heart
By combining the agility and innovation inherent in fintech with the stability and experience of traditional banking, firms can create a well-rounded approach that benefits both the business and its customers.
The dynamic relationship between traditional banks and fintech firms reveals a two-way street of learning. Fintech firms can draw valuable lessons from banks, emphasizing the significance of regulatory compliance, risk management, customer trust and security, scalability, technological infrastructure, diversification of services, and the power of partnerships.
By recognizing these lessons, fintech companies can navigate the intricate landscape of the financial industry, fostering sustainable growth, innovation and resilience. As the financial ecosystem continues to evolve, collaboration and a thoughtful integration of best practices from both types of organizations will shape the future of financial services.
About the author:
Alex Jimenez is a Las Vegas-based fintech consultant. He was the chief strategy officer for Finalytics.ai and Extractable. He also has held various positions at Zions Bancorp., Rockland Trust and Bank of America.