US Open Banking Regulations Drive Bank-FinTech Collaboration

The landscape of the financial industry is undergoing a significant transformation, leading to a shift in the relationship between traditional banks and FinTech companies, according to PYMNTS. Historically, banks viewed FinTechs as fierce competitors due to their technological expertise, agility, and ability to deliver superior customer experiences. However, the dynamics are changing as both sides adapt to economic pressures, regulatory requirements, and evolving customer preferences, resulting in a growing emphasis on collaboration.

Major financial institutions, including JPMorgan and American Express, have recognized the potential of FinTechs and have pursued acquisitions. In fact, there has been a substantial increase in banks’ interest in acquiring FinTech companies. Moreover, partnerships between banks and FinTechs have become more prevalent, with 89% of banks considering such collaborations at least somewhat important, compared to 49% in 2019. Both parties have realized that a collaborative approach can be mutually beneficial in the face of a shifting industry landscape.

The «FinTech Tracker» delves into how FinTechs and banks can derive advantages from working together and explores why collaboration has gained favor recently.

Grasshopper Bank, as part of its efforts to foster closer ties with FinTechs, has forged partnerships in 2022 with Treasury Prime, FIS, Visa, Autobooks, and others. These collaborations aim to modernize and enhance Grasshopper Bank’s existing capabilities. The results have been promising, with the bank reporting a remarkable 262% year-over-year increase in loans.

Lloyds Banking Group is also seeking to deepen its relationship with FinTechs. The bank recently introduced a 12-week program in which selected FinTechs will have the opportunity to compete for a chance to partner with the bank and become eligible for Series B funding. This initiative builds upon a similar program conducted last year, which culminated in a £4 million investment in FinTech company Caura.

Regulators have intensified their scrutiny of financial institutions, including banks and FinTechs, in response to a surge in fraudulent activities in 2022. Instances of external fraud and high-profile internal fraud cases, such as the FTX scandal that reverberated throughout the crypto industry, have prompted regulators to heighten their vigilance.

PYMNTS interviewed Kiran Hebbar, CFO at Alloy, an identity decisioning platform, to gain insights into the growing significance of compliance in bank-FinTech relationships.

The ongoing overtures of collaboration between banks and FinTechs come at a crucial time, as a closer relationship may soon become essential. Last October, the Consumer Financial Protection Bureau (CFPB) introduced an open banking framework that is poised to have profound implications for both FinTechs and banks. The framework, which is expected to take effect possibly in 2024, mandates that banks provide qualified third parties access to consumer financial data, including transaction and deposit details, as well as personal information, through application programming interfaces (APIs).

While the specifics of the framework may undergo revisions, compliance will depend on the interdependence of banks and FinTechs. Banks, in particular, have faced challenges related to APIs, with 81% of surveyed banks citing a lack of API experience as a hurdle when collaborating with FinTechs, according to a study.

The changing financial landscape and forthcoming open banking regulations in the US are propelling banks and FinTechs towards increased collaboration. The evolving dynamics and mutual benefits of working together are encouraging financial institutions to seek out partnerships and acquisitions, ultimately driving innovation and enhancing customer experiences in the industry.