With the advent of robo-advisors, artificial intelligence (AI), and virtual assistants, the next wave of the financial technology revolution could arrive sooner than anticipated.

A report by EY, “Unleashing the Potential of Fintech in Banking,” highlights that collaborating, instead of competing, with startups can provide fresh tech solutions for banks. Shared services and knowledge will improve product offerings through data analytics tools like predictive analytics, offering deeper engagements with customers.

How are banks currently leveraging fintech?

Albeit independently, banks are building in-house technology in response to the growing fintech challenge.

In 2017, JP Morgan appointed a new team for the automation of legal work. In the past, agreements consumed over 360,000 hours of work each year by lawyers and loan officers. Using a program named Contract Intelligence (COIN), hours of reading would be automated, finished in seconds, and will have fewer errors.

Further, JP Morgan  invested over US$9.5 billion in technology in 2016, of which $3 billion is “dedicated toward new initiatives” and a $600 million fraction lined up for “emerging fintech solutions.”

In February 2017, Wells Fargo created its own AI team to provide more personalized services and strengthen digital offerings. Recently, four early-stage fintech startups, Edquity, Hurdlr, Redrock Biometrics, and SimSpace joined Wells Fargo Startups Accelerator, a program intended to create solutions for enterprise customers. Launched three years ago, the program aims to explore emerging technologies in analytics, cybersecurity, payments, AI, mixed reality, and other areas in pursuit of breakthroughs for financial services.

But the current level of engagement has done little to exploit the full potential of technology. In an analysis of 45 global banks, the EY report reveals that only 25% of the surveyed banks extensively engaged with fintech firms.

Through collaborations, fintech startups and banks can have access to broader markets, along with a number of other benefits. According to Matt Hatch, partner and Americas FinTech Leader at EY:

“Last year [2016], the average return on equity (ROE) for the largest 200 global banks was just over 7.1%. Banks can increase their ROE by collaborating with fintech [companies], which has the joint benefit of driving down cost while accelerating innovation,” he said.

“Taking the first step is often difficult because of a general reluctance to change – even when there is an appetite to be a part of an innovative, cutting-edge organization. Before embarking on this journey, make sure your ducks are in a row. First, look internally at current systems and offerings. Then ask – how can we use fintech partnerships to enhance what we currently have in place? Over time, integrate innovation as a central part of your growth strategy.”

Why collaborate?

1. Growing fintech innovation

Due to a plethora of data, fintech startups have gained significant traction. By introducing innovative ways, they are successfully offering products and distinctive solutions for consumer demand.

In the third quarter of 2017, global VC-backed fintech startups raised as much as $4 billion across 278 deals. In 2012, for the same quarter, fintech startups had attracted only $759 million across 105 deals. Their growing popularity is a big reason why banks need to enter sooner for a timely adoption of technology.

2. Increasing awareness in customers

Collaborations will provide the perfect opportunity to leverage the full potential of the technology and will allow them to meet the demand of digitally savvy users.

EY FinTech Adoption Index 2017 released in June 2017 indicates that the appetite of digitally active consumers has risen considerably, from just one in seven digitally active consumers in 2015 to one in three in 2017. The report also shows that in 2017, there are 84% consumers aware of the fintech facilities in comparison to just 62% in 2015. The same reports show that the fintech adoption rate is expected to reach an average of 52% globally from the current rate of 33% in 2017.

The maximum usage of fintech is happening along the lines of payments and money transfers, with 50% of consumers choosing such services in 2017, in comparison to just 18% in 2015. Such growth in numbers could soon blur the boundaries between different financial services, laying down new standards for the industry during the process. To stay ahead of the curve, financial firms would benefit from the technical assistance from the fintech startups.

3. Win-win situation

For startups, partnerships with financial institutions will provide access to funds for future growth. With joint efforts, their businesses will more likely be scalable and sustainable in the long run.

For banks, such partnerships would mean a data-driven approach with lesser costs, low redundancy, solid technical know-how, and increased efficiency. Banks can significantly reduce structural costs, provide employees more time for value-added tasks, and enable enhanced regulatory compliance.

Unified efforts can create a solid financial system that works for all. Such engagements should work with the highest integrity, strong level of security, and greater transparency to reap the full benefits of the next wave of tech innovation.