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The increasing overlap between finance and emerging technologies is driven by technological innovations and prompted by customer desires. Financial institutions are moving toward technology, and technology firms are moving toward finance. This phenomenon is one of the essential hallmarks of today’s digital economy.

Interestingly, in this context, banks are being upended not by nimble fintech start-ups, but by established tech firms. As Bain notes, In China, e-commerce giant Alibaba has amassed the world’s largest money-market fund, issued $96 billion of loans in five years, and grown Ant Financial to a market capitalization roughly equivalent to the ninth-largest bank in the US.  In the US, Amazon Cash gives customers the ability to deposit cash directly to their Amazon accounts from more than 10,000 retail locations throughout the US. Amazon has also loaned more than $1 billion in the past year to small merchants selling through its online platform.

A new approach for a new era

What, then, can banks do in this challenging—if not existentially threatening—environment? Banks must be able to adopt new innovations rapidly as they happen.  Historically, banks have created sustained competitive advantage and defended it for decades. This view needs to go out the window; today’s hyper-competitive environment will not allow it.  Maintaining a competitive advantage is a continuous process of sourcing and replacing emerging technologies within the portfolio as they become available and retiring those the market has not selected. Rather than defending longstanding advantages, banks must welcome the practice of cultivating transient advantages—and being consistently hungry for potentially game-changing innovations. Moreover, to seize opportunities in the rapidly evolving fintech space, financial institutions must address slow capacity for change and restructure legacy processes to enable decision-makers to act once those potential transient advantages are identified.

What fintechs and banks can offer one another

Fintechs provide banks with extremely useful market intelligence. Banks can see which new offerings show promise and use that information to deploy new solutions rapidly through acquisitions and partnerships. In fact, more than 50 percent of banks report they are actively searching for acquisitions, partnerships, and accelerators to access exciting new technology, and more than 80 percent expect to increase fintech partnerships within the next five years.

One example of banks partnering with fintechs is Empower. The Empower app launched in May 2017 as an AI-powered tool to improve consumers’ financial health—and since Empower isn’t a bank, it can’t hold customers’ checking and savings account balances. To fill this need, it partners with Evolve Bank and Trust, a 93-year-old bank based in Memphis.

And to be sure, it’s not just a matter of banks needing fintechs: the reverse is true as well. They each have their strengths and weaknesses. The fact is, fintechs have little to offer without the data, trust, operational excellence, and regulatory standing that established financial institutions can provide. Both therefore need to become strong collaborators, or neither can realize the full value of technology innovation.

Microsoft can provide banks with the digital capabilities needed to beat the competition at their own game and remain relevant to today’s customer experience expectations.