The Future of Financial Services: Collaboration and Competition Between Fintechs and Banks

The global fintech market is growing rapidly with a market size expected to top $608 billion by 2029, almost doubling from a projected $312 billion this year. In part, this can be attributed to the agile solutions and customer-centric approaches of fintechs when compared to those of traditional banks. However, to drive true value in the financial services ecosystem, fintechs need to identify ways to cooperate with banks while still treating them as a potential source of competition. Even though banks have long been the foundation on which the financial industry has been built, their legacy infrastructure often hampers their ability to innovate quickly.

API challenges

For instance, integrating financial data across multiple platforms is a significant challenge for businesses relying on banks. The lack of standardized, easy-to-use APIs creates friction, slowing down processes and increasing operational costs. This is where fintechs can excel. By leveraging advanced technology, fintechs are able to create custom APIs that streamline these integrations, offering businesses a more efficient and cost-effective way to manage their financial operations.

Fortunately, things are changing. McKinsey research shows that banks have started relying more on APIs internally to reduce the costs and complexity associated with IT integration. The research shows that approximately 75% of banking APIs are used for internal purposes, and banks plan to double the number of internal APIs by 2025. Furthermore, nearly 20% of banking APIs are used externally to support integration with business partners, including suppliers.

A transactional environment

Despite their technological shortcomings, banks still play a critical role in the financial ecosystem due to the sheer volume of transactional banking they provide. Their expansive networks and deep liquidity pools are indispensable, particularly in foreign exchange (FX) trading. Fintechs, no matter how advanced, cannot match the liquidity and reach that the biggest banks provide. It’s therefore imperative for fintechs to establish connections with multiple banks and trading rooms to ensure greater liquidity, whether to provide better FX rates for their customers or to achieve other goals that require significant volume.

One of the challenges in the FX market is to continuously build expansive integrations with an array of banks and trading platforms. This approach not only enhances liquidity but also ensures that clients receive FX quotes that are closer to the interbank rate. But even though fintechs can offer competitive rates, it's the big banks that set the interbank benchmarks. Understanding and leveraging this dynamic allows fintechs to provide superior services while capitalizing on the established frameworks of big banks.

Industry benchmarks

In the world of FX, the interbank rate is the gold standard. All market participants, from large corporations to individual traders, refer to this rate when evaluating quotes. However, the actual rates offered to business customers by banks are often significantly higher due to several factors such as spread and fees.

Fintechs can disrupt this model by offering more transparent and competitive rates. The challenge here is to provide FX quotes that are as close to the interbank rate as possible, enhancing value for the clients. However, achieving this requires fintechs to be adept at navigating the complex landscape of interbank rates and leveraging advanced algorithms to optimize pricing.

There’s significant potential for fintechs to collaborate with banks in this regard. These partnerships can enable fintechs to access critical infrastructure and liquidity, while banks of all sizes stand to benefit from the technological advancements and customer-centric solutions offered by fintechs.

The future of financial services therefore doesn’t necessarily lie in a zero-sum game where clients must choose between fintechs and big banks. Instead, it requires the co-existence of both. By recognizing the strengths and weaknesses of each, a more inclusive and innovative financial ecosystem can be built.