“Disruption” is usually the first thing that comes to mind whenever the relationship between the established financial service behemoths/ banks and new-age FinTech firms is discussed. After all, FinTech firms have already made deep inroads into areas like payment processing, digital wallets and other tech heavy applications. However, banks and FinTech/ BigTech firms don’t really have to be on a head-on collision course.As always, there is a lot more to be gained from collaborating rather than cannibalising each other’s market shares. The key is to leverage each other’s strengths to create something that is more than the sum of its parts.The ability to assess risk, for example, is a key strength of commercial banks and a bread and butter activity for many of them.
The reason FinTech firms have had limited success in areas such as direct lending is because it requires robust credit risk management capabilities.Credit risk assessment is not simply a matter of building the appropriate risk models or assigning probabilities of default or running multiple simulations.
More than any of that – it is about the quality and quantum of the underlying data.
Banks already serve as secure data vaults housing mountains of data right from transactional records to all the information one can possibly need to monitor credit, operational or market risks of their clients. In fact, the core competency of a commercial bank is managing these risks in the first place. While having this data is what allows banks to assess the credit and operational risks of their clients, keeping it absolutely secure is what helps them manage their own business and operational risk!
Securing data is not just a matter of regulatory compliance or reputational risk, it is what allows banks and other financial service firms to remain competitive. This is why the most sensitive data is protected with industry leading technologies like dedicated Hardware Security Modules (HSMs) which hold the keys to the kingdom.
Given their roles as sentinels of risk related data, banks are in an ideal position to offer cloud based HSM solutions to others for safeguarding such data and managing access to it. FinTech firms and even smaller regional banks can then make use of these cloud based HSM services and leverage industry leading security solutions without having to make large capital investments into what might be a non-core, yet critical, activity for them. And for the large banks providing these cloud HSM services, it creates a new revenue stream.
But they don’t really have to stop there – banks can partner with the FinTech firms to truly leverage each other’s strengths. The FinTech firms can provide the front-end user experience for the end-customers while the banks manage the risk data and regulatory compliance at the backend.
It combines the customer centricity of a FinTech with the risk and data management capabilities of a bank, all secured by robust, industry-leading technologies like HSMs.
This is just the tip of the iceberg in terms of the opportunities that collaboration can bring. The more distinct the collaborators are, the more synergy they can create when they partner up to offer an existing service in an entirely new way. Banks can thus leverage their position as data vaults and offer cloud based HSM services to attract smaller FinTech firms. And the FinTechs in turn benefit from the additional security provided without having to incur additional capex.