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If banks want to continue to cut costs, then they need to deploy nascent tech such as blockchain and machine learning.

Banks are partnering with fintechs to spread risk and cost, and building the tech that will differentiate themselves in-house.

Technologies like AI, machine learning, and blockchain have become buzzwords on Wall Street, and for good reason. They have the potential to make financial services firms more efficient.

AI, for instance, could translate into productivity gains of 20% to 30%, according to the recently released "Pathways to Profit" report by Broadridge, the financial technology provider.

The deployment of new technologies, however, will take place through a mixture of in-house development and fintech partnerships, according to the report.

Banks can't go it alone

Building out new tech infrastructure requires money and talent. But getting that talent and money is easier said than done for some banks, which are already burdened with declining returns on equity and costly legacy systems.

"Overall, ROEs declined from 12% to 8% in 2016," the Broadridge report said. "ROE for the top 10 banks remained at 5% in 2016, but rebounded to 7% in the first half of 2017, with European institutions facing greater pressure."

Banks then are stuck between a rock and hard place. They are under pressure to cut costs, but if they don't put the necessary cash into new tech initiatives, then their cost problems intensify. That's where fintechs step in.

"Given the imperative to cut costs and the opportunities offered by new technologies, many institutions are now actively seeking to embrace partners," the report said. "They are leveraging partnerships to add innovation in areas where they lack expertise or scale, or to enable them to focus the expertise they do have on their most differentiating areas."

Josh McIver, CEO of ULedger, a blockchain tech company that has partnered with one of the Big Four accounting firms, told Business Insider, partnerships between legacy firms and fintechs are important because they spread out the risk of adopting new tech.

"Even if you could spend the money to build a new blockchain platform, for instance, what happens if you build the wrong platform?" McIver said."You can't flick an off-switch."

Still, banks aren't just sitting on their hands and letting fintechs do all the work. JPMorgan, for instance, spends near $9.5 billion per year on technology, according to Brian Marchiony, a spokesman for the firm. Banks, according to Broadridge, are better suited focusing on the tech that "genuinely differentiate their firms from the competition."

Collaboration is happening

JPMorgan is one firm that has turned to tech providers for help digitizing its infrastructure. The bank notably partnered with Virtu, a high-frequency trading firm, to enhance its dealer-to-dealer trading operations for electronic treasury trading. But in this case JPMorgan is just partnering on the tech connected to their routing execution. The IP and client relationships remain under JPMorgan control.

"You cannot afford to not have the best technology in the organization," Daniel Pinto, CEO of JPMorgan's corporate investment bank said in an interview with Business Insider at the end of last year. "In my view, that is a mix of your internal resources and partnerships, either with vendors or with companies that you're going to partner with to deliver a product."

Here's Ana Capella, managing director and head of strategic investments, in an email to my colleague Becky Peterson (emphasis ours):

"We utilize strategic investments in fintech companies to accelerate innovation and digital transformation across JPMorgan Chase. Key drivers for these investments include enhancing the customer experience with new and better products, improving control, compliance, and operational efficiency and protecting the bank’s assets.”

JPMorgan also launched a residency program for fintech firms in order to tackle strategic and security-related challenges using big data, blockchain technology, and machine learning. Such incumbency programs have taken off on Wall Street. Deutsche Bank in March announced a new innovation lab in New York City to facilitate exploration into "new technologies focused on several areas including artificial intelligence, cloud technology and cyber security."

The pay-off for such partnerships could be big, according to the Broadridge report.

The firm's research suggests $2 to $4 billion of the total near $24 billion spent on trade processing costs could be "eliminated" for partnerships on non-differential tech, for instance.

It will also allow banks to focus internally on things that will set them apart.

"By adopting a partnership approach to take advantage of the biggest technological advances in a generation, banks can free themselves to work on standing out from the competition, putting themselves on a stronger pathway to profit," the report said.