In past times, banks and fintechs would have been seen as competitors. While some fintechs stand alone and compete with banks, the tide has been changing for some in recent years. Many banks no longer view fintechs as a threat but as potential partners.
Fintechs are far more agile than banks. This allows them to develop solutions and embrace new technologies much quicker. Banks aren't slower because they lack motivation. Legacy systems, regulations, and compliance constrain traditional financial institutions. Fintechs are outside of the regulations that tend to hold back traditional finance.
Additionally, banking compliance is extremely costly and time-consuming. Because fintechs don't have to deal with the same level of compliance, they have lower costs and more time to develop solutions.
For the above reasons, many banks have partnered with Fintechs. This allows banks to take advantage of new technologies and lower their cost in the process.
Despite their many advantages, fintechs can present risks to banks. As mentioned above, fintechs are third parties that don't adhere to the same regulatory requirements as traditional finance institutions. Fintechs basically fall into a regulatory gap. This gap concerns the OCC (Office of the Comptroller of the Currency).
To resolve the regulation gap problem, the OCC wants banks to actively monitor fintechs and be responsible for any risks due to partnerships with fintechs. However, risks are often spread across several areas, muddying the question of who is responsible for specific risks.
Finally, one big disadvantage for banks is their legacy systems. These systems are decades old and nearly impossible to replace. But at some point, legacy systems will need to be replaced with modern systems, a painfully slow process. Banks are bolting on new digital offerings from fintechs to keep up with technology. This allows them to extend legacy systems. These extensions in no way replace legacy systems but allow banks to keep older systems running while providing the latest digital offerings.
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