The financial services industry faces a quandary. Over the past several years, the fintech ecosphere has burst with investment and groundbreaking innovation. The persistent launches of finserv offerings from non-banks has driven fintech and financial institution (FI) partnerships movement sparked by an application programming interfaces (APIs). Meanwhile regulators appear more concerned about FIs and fintechs growing closer to each other. 

Fintech awareness among consumers is high. A Fiserv survey discovered consumers are highly aware of third-party services for payments, budgeting, investments, and lending activities. Fintech startups have also introduced financial service offerings for actions such as payroll banking and insurance account aggregation, connectivity, and know-your-customer (KYC) instruments. These innovative fintechs also created links joining Web2, today’s most familiar version dominated by companies that provide services in exchange for personal data; and Web3, the developing decentralized apps that run on blockchain.

Additionally, newbie financial technology companies keep coming. Per Statista, the number of financial technology startups, as of November 2021, reached 10,755 globally with some 41% in the Americas. In comparison, there were 9,323 such startups in the EMEA region (Europe, the Middle East, and Africa) and 6,268 in the Asia Pacific region.

The Tension Between Banks and Fintechs

However, regulation apprehensions are at least building some speed bumps into the on-ramp of some financial institution-fintech partnerships. 

As more financial-services activity moves from regulated banks to entities and platforms with little or no oversight, so do the associated risks suggested an International Monetary Fund (IMF) blog. “Despite fintech stepping in to challenge traditional banks on their own playing field, they bring more than competition. In fact, the two often remain intertwined, including through the provision of liquidity and leverage by banks to fintechs.” The article also held, “Policies that target both fintech firms and traditional banks proportionately are needed. This way, the opportunities that fintech offers are fostered, while risks are contained.”

Some regulatory roadblocks have caused some changes in plans.

Recently, a venture-backed robo-adviser Wealthfront announced its acquisition deal with Swiss bank UBS for $1.4 billion fell through. Instead, UBS invested $69.7 in Wealthfront for $1.4 billion. In January 2021, Visa’s cancelled plans to buy Plaid, a data-focused fintech startup, for $5.3 billion. Both deals dissolved in part at least due to regulatory concerns, according to reports.

In September 2022, Reuters reported “the rise of fintech services and digital banking could spur financial risks and potentially a crisis over the long term,” citing Michael Hsu, acting Comptroller of the Currency. “I believe fintechs and big techs are having a large impact and warrant much more of our attention.” Hsu added.

Hsu also warned that the “encroachment of fintech companies into the traditional financial sector, including via partnerships with banks, was creating more complexity and ‘de-integration’ across the banking sector.” Reuters described Hsu’s concerns that “banks and tech firms, to provide a seamless customer experience, teaming up in ways that make it more difficult for regulators to distinguish between where the bank stops and where the tech firm starts.” 

Reuters also mentioned Gene Ludwig, managing partner at Canapi Ventures and a former Comptroller of the Currency, who warned that regulations for fintechs are much less strict than those that govern banks. “The non-banking industry is getting away with murder,” said Ludwig.

FIs Still Need to Close Innovation Gap

Despite regulators’ increased attention, banks and credit unions need fintech partnerships to accelerate innovation and growth. Q2 Holdings, Inc. in a new report on banking innovation and digital evolution revealed more than 60% of financial institutions surveyed see fintech partnerships as key to their growth strategy; however, only 12% of the respondents said they have fintech partnerships and can add new ones quickly.

The study also pointed to the challenges they are facing to deliver new innovations and continue their digital evolution: 73% of the financial institutions surveyed reported that their data is aggregated across all processes and systems, but less than half are using this information to personalize customer experiences; more than half of financial institutions are providing separate digital experiences for their consumers and business customers, and less than a third of the financial institutions surveyed say they can deliver new services to market in six months or less.

The Q2 survey also revealed more than a third of the financial institutions had multiple fintech partnerships, but many reported difficulties establishing and scaling them adequately to make a significant impact.

One of the keys to capitalizing on fintech capabilities involves personalization, which Q2 discovered is very important or critical for 71% of financial institutions. Data is the key to unlocking these personalized experiences and, although 73% describe aggregating customer data across their processes and systems, fewer than half (47%) are leveraging it to provide customized services.

An effective personalization strategy enables financial institutions to deliver the customized, relevant experiences that grow account holder relationships. 

Foundations for Successful Fintech Infrastructure

The use of — and versatile nature — of APIs has allowed a new fintech generation to flourish. Because many API providers are cloud-based and designed to mix-and-match, they support adoption virtually or physically.

The first wave of this new fintech generation focused on unbundling consumer banking offerings, providing tech to financial institutions, and allowing neobanks, challenger banks, and non-banks to compete against slow-moving incumbents.

Now many traditional financial institutions caught on to the opportunity given them by fintechs willing to partner to share technology. Fintechs can also benefit from bank and credit union access to extensive ready-made user bases. 

The key to these partnerships lies with APIs that join disparate systems. What could help with this digital transformation is a marketplace of pre-fabricated fintech integrations.

NXTsoft’s OmniConnect Platform, for example, employs cutting-edge cloud technology to securely connect fintech solutions to financial institutions, ensuring a safe and reliable integration, and providing an open banking marketplace for all API needs. NXTsoft’s API connectivity provides a best-of-breed connectivity solution for financial institutions and fintechs with pre-built API integrations into many existing applications. 

NXTsoft also provides connectors for as many as 40 different banking core accounting systems using the strongest technology foundation, the most cutting-edge cloud-based technology; and following the highest industry and regulatory standards.