Fintech: Should You Build, Partner, or Acquire?

September 30, 2015 at 6:15 PM

The financial technology revolution has affected a variety of industries and is transforming the way banks are doing business.  Every day, we see new headlines that focus on the competitive challenge financial technology companies pose to banks.  While financial technology, or “fintech”, companies pose a threat to steal market share from banks, the fintech revolution presents an important opportunity for banks.  Some banks are leveraging fintech capabilities to make their branch networks more efficient, grow their customer bases, and improve digital banking user experience and accelerate its progress.  Banks are building, partnering, and acquiring new fintech capabilities:

Strategy #1: Build

Many banks have developed financial technology tools internally to satisfy the self-serve preferences of younger customer segments and to create more profitable branch networks.  For example, Wells Fargo ($1.7T; San Francisco, CA) has built several “mini branches” in Washington D.C. that are approximately half the size of the typical Wells Fargo branch and include advanced technology that feature a multitude of self-service options.  Within these mini branches are tablets as well as ATMs that present customers with a customized “favorites” section on the touch screen homepage determined based upon the customer’s previous ATM transactions.  Technological advances such as these enable banks to reduce branch size in terms of staffing levels and square footage, thus reducing costs and increasing efficiency.

Strategy #2: Partner

Many small banks do not have the capital needed to develop technologies internally and have partnered with fintech companies to enhance product and service offerings.  WSFS Financial Bank ($5.1B; Wilmington, DE) has formed a partnership with fintech company ZenBanx, which has created an app that allows customers to hold and exchange multiple currencies within a single account.  The bank expects to open 37,500 new “ZenBanx” accounts in its first year of partnership.

Strategy #3: Acquire

Banks have also exercised the option of acquiring fintech companies.  In 2014, BBVA Compass ($88.5B; Houston, TX) acquired the fintech company Simple, which provides online banking services including money transfers and ATMs and offers deposits and online bill payment services.  The fintech company focuses on the user experience of these services, which has helped the bank continue its mission of innovation within the financial services industry.  BBVA has added 100,000 new US accounts as a result of the acquisition.

The intertwining of banks and fintech companies is inevitable in the financial service industry.  Banks that understand this and act upon this opportunity will be far better off in the long term than those that remain complaisant and assume today’s banking is business as usual.

Ben Ringwood

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