Fintech startups are a real threat to traditional financial institutions. So how will these companies respond? Partnerships is the answer.

According to a recent Business Insider (BI) Intelligence study, legacy banks face the greatest disruptive threat from nonbanks that provide similar services. There are a number of options for responding to this threat which include the following:

  • Building similar products in-house; or
  • Acquiring their competitors, or
  • Forming partnerships.

The most likely response in my opinion is that these legacy banks will adopt a strategy of partnering with smaller fintech firms in order to control their services and bring them to a wider customer base. This strategy is often easier than building the same or similar services in-house. Fintech startups can often focus all their efforts on building great user experiences while banks must overcome the resistance of innovating within a legacy system (which may or may not be possible in the first place).

Nonetheless, many of these startups still have a lot to prove before they become acquisition targets. Partnerships will give banks an opportunity to try before they buy. We’ve already seen this strategy adopted in the alternative lending industry. For example, major banks like ING and JPMorgan Chase have partnered with digital-based alternative lenders like Kabbage and OnDeck in order to better fund small businesses.

It is very likely that over the next 12-18 months, we will see a lot more consolidation in this market through partnerships and other similar ventures between the big banks and their smaller fintech competitors/disruptors.


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