Good things tend to consolidate as the cream rises to the top.
The FinTech sector has seen meteoric growth over the past decade, disrupting traditional financial services and revolutionizing how consumers and businesses transact. Recent trends, however, indicate a shift toward consolidation in the space.
“It took only a couple events to bring about a pretty good consolidation cycle,” Priority Chief Strategy Officer Sean Kiewiet told PYMNTS.
“Back in the heyday, it was expanding,” he added. “Every month, there was news of a new partnership forming.”
However, while bank-FinTech collaborations offered the promise of blending the strengths of both parties — stability from financial institutions and innovation from FinTechs — many smaller players, particularly those with unproven technology, began to fall away as the FinTech ecosystem matured.
The shift marked a departure from the period of rapid expansion and experimentation that characterized the early days of bank-FinTech partnerships. Now, the market is composed of banks that are more selective in choosing partners and FinTechs that have proven their value proposition, Kiewiet said.
At their best, bank-FinTech partnerships allow both parties to use each other’s strengths.
“It’s the promise of the best of both worlds,” Kiewiet said.
He highlighted how banks provide the stability that customers value, ensuring that core functions like safeguarding deposits remain reliable and consistent. On the other hand, FinTechs bring speed and innovation, enabling services such as real-time payments and access to funds that meet modern consumer expectations. This synergy is crucial, as it allows banks and FinTechs to deliver enhanced financial services without each side needing to become what they are not.
Banks, which are traditionally slow to change, benefit from FinTechs’ ability to innovate quickly. Conversely, FinTechs use the established trust and regulatory expertise of banks, which is essential in a heavily regulated industry like finance.
The challenge for banks is that while customers expect speed, they also value the slow, methodical nature of traditional financial institutions, explained Kiewiet.
“We don’t necessarily want our banks to move at breakneck speeds,” he pointed out, noting that the slow pace of change is often what customers trust about their banks.
The goal, therefore, is to create partnerships where FinTechs can enhance the customer-facing elements of the banking experience — such as user interfaces and real-time services — without compromising the core stability that banks provide.
While bank-FinTech partnerships offer potential, they are not without risks. One of the key challenges is the cultural and operational differences between FinTechs and traditional banks. Kiewiet pointed out that FinTechs often prioritize rapid iteration and innovation, an approach that can clash with the more rigid, requirement-driven processes of banks.
“Banks operate with a very specific set of requirements, particularly around things like regulatory capital and risk structures,” he explained.
FinTechs, by contrast, tend to adopt a more iterative approach, trying out new features and adjusting them based on user feedback. This mismatch can lead to operational issues, such as discrepancies in daily fund balances or misalignments in ledger systems, which can create problems for banks that rely on precision and regulatory compliance.
“Banks, in our experience, may have quarterly product releases while FinTechs might be doing real-time or weekly release,” he said. “And the expectations around those roadmaps need to be coordinated and communicated.”
But in cases where FinTechs offer highly specialized services — such as loan processing or specific payment innovations — vertical partnerships can be successful. These FinTechs provide a more user-friendly interface for services that banks already offer, without fundamentally changing how the bank operates. This allows for a smoother integration and less risk of operational disruptions, Kiewiet said.
However, when FinTechs take a more generalized approach, such as offering Banking-as-a-Service or Commerce-as-a-Service solutions, the risks increase. Banks often operate on batch-based systems, processing transactions in defined time intervals. FinTechs, on the other hand, typically operate in real time, and aligning these two different models can be challenging. For example, real-time payments might create situations where funds are made available to customers before they are settled, leading to potential issues if a transaction is later rejected.
Ultimately, the most successful partnerships are those built on a deep understanding of each party’s strengths and limitations, Kiewiet said. By focusing on well-defined use cases and carefully aligning their operational models, banks and FinTechs can continue to drive innovation in the financial services industry while maintaining the stability that customers rely on.
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