Making Fintech Fit — Banks Weigh Risks, Rewards of Fintech

Ed Page, Managing Director Technology Strategy, Financial Services

Forward-thinking banks are acquiring and partnering with fintech firms to survive and thrive in an increasingly tech-enabled marketplace. By adopting emerging technologies and enabling open APIs (application programming interfaces) to allow third parties to build applications and services around them — a concept known as open banking — banks are hoping to offer richer and more personalized experiences to find and keep more customers.

The rewards of open banking are among the topics being discussed this week at Empire Startups’ FinTech Week in New York. CX-focused personalization — giving customers an app-like control and visualization of different aspects of their finances — is a hot topic at the event, as is the next big leap in blockchain-based payments, among other exciting discussions.

Less often discussed, but equally significant, are the challenges associated with this evolving strategy as banks grapple with how to incorporate fintech into their legacy system-dominated ecosystems.

With so many fundamental changes underway, both technological and cultural concerns naturally arise. Traditional financial institutions have largely been built on a locked-down, internal-fortress mentality, and many institutions will need to rewrite their rulebooks and encourage employees to embrace change and adapt to the blurring of organizational boundaries and emerging technologies to remain competitive.

Many organizations must face the reality that older legacy systems often don’t integrate well with the latest generation of technology — but find the prospect of addressing this “technical debt” daunting and fraught with risk. Banks are challenged to simultaneously make their systems more permeable (easily accessed and integrated), more customer-centric, more stable and more secure to pave the way for fintech integration.

Additionally, it is important to remember, in the midst of all the excitement surrounding fintech, that the introduction of third parties into the ecosystem can result in heightened need to monitor and manage third-party risk. The risks associated with fintech firms may manifest differently than those typically associated with large and established data processors, as fintech startups often have less mature and less consistent risk management practices.

What all this means is that banks embarking on a fintech journey need to go into those relationships with their eyes wide open. Significant opportunities for reward await, but there are also challenges and risks. In particular, incumbent financial services firms need to make sure they have a plan in place to modernize the legacy environments, as well as an appropriately scaled and managed third-party risk management program to address the risks commensurate with the expected rewards of integrating fintech capabilities.

As I wrote back in September, financial regulators are all over this new reality and are writing new rules as we speak. The European Union’s second Payment Services Directive (PSD2) became effective in January this year, and Japanese regulators are working side by side with industry experts to help shape the innovations. In the U.S., the Office of the Comptroller of the Currency has been working on the fintech side to develop ways to effectively balance innovation with security and privacy. This balance, though not as exciting as some of the new technologies and capabilities, is sure to be a critical success factor as the push to adopt fintech evolves.

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