Banks operating on legacy systems created 30 to 40 years ago are becoming far more open to working with third-party innovators, which have no interest in the baggage that would accompany becoming a direct competitor to the banks themselves.
Upcoming research from Deutsche Bank indicates this trend taking a firmer hold in the coming year, particularly in the business-to-business payments and corporate banking spaces.
"Many of the upcoming payment service firms don't want to deal with the regulations and capital requirements to become a bank," said Kevin Garlan, vice president of global solutions, financial technology for Deutsche Bank. "So they still need a banking provider to access the rails and networks that drive the global commerce and transaction processing."
Garlan is one of the authors of a Deutsche white paper to be released this month that outlines the investment bank's views of the payments and financial services technology market.
"It has been a main focus for us to look at these third parties and technology providers as partners to incubate their technology and transfer that into our institution to better serve ourselves, our clients and their clients," Garlan said.
There are many more examples of service providers either working with banks or providing a complementary service.
Dwolla, for example, has approached smaller banks with an application programming interface to allow real-time payments as an alternative to what it considers the more cumbersome Automated Clearing House system.
Another example is Linked2pay, which has developed the Bank Centric Payments platform to integrate various payments and financial services as a single registration and communication tool for merchant clients and acquirer partners.
The trend is fueled not only by third parties' reluctance to compete with banks, but also a regulatory environment that discourages banks from taking the risks these smaller firms can handle, said Gil Luria, analyst with Los Angeles-based Wedbush Securities.
"Even if that risk might be meaningful, the regulators are keenly sensitive to banks that have a current business and support customers to be taking on any risk," Luria said. "That really limits what banks can do, in the broadest terms."
In addition, banks generally operate a profitable business, which functions as "an incentive not to rock the boat and risk that current business," Luria added.
Deutsche Bank is addressing these concerns by developing a "fail-first" environment to research and test new technology in Silicon Valley, London and Berlin.
"It's like Silicon Valley where you build a prototype and if it fails, you make the second one much better," Garlan said. "In the innovation ecosystem, you are going to pull in others to work collaboratively to solve problems."
In that scenario, the banking industry will find itself "on the cusp of where we need to be, as financial institutions continue to broaden their appetite and take steps to better the industry as a whole," Garlan added.
Research firm Celent has kept close watch on the banking industry and innovation for several years.
"We definitely see a shift in attitudes and readiness to partner and collaborate on both sides, fintech and banks," said Zil Bareisis, a London-based senior analyst for Celent.
Both parties are starting to appreciate that they have assets that could be valuable to another side, such as scale and customer relationships from banks and innovative technology and culture from fintech players, Bareisis said.
Even TransferWise, which has a history of positioning itself as an alternative to banks, is partnering with a bank in Estonia, Bareisis added. Such a move is likely to lead TransferWise to more conversations with banks.