Customers don’t care where solutions come from, as long as they solve their problems. That’s why more financial institutions (FIs) are viewing fintechs as partners and collaborators, rather than competitors. Banks provide a ready slate of customers, established sales and distribution channels, and deep regulatory knowledge. Fintechs offer new perspectives, nimble development processes and cutting-edge technology. Together, these collaborations can create exciting new opportunities and reduce many of the friction points so common in banking and payments.
But, not every fintech-bank relationship will create a match made in heaven. As a banking executive, how do you navigate the growing landscape to find the right option to meet your needs, while ensuring it’s a partnership that lasts? Read on to discover practical guidance and tips to ensure your financial institution’s next partnership will be a success.
Fintechs are here to stay
Investors are flocking to fintechs. Investment levels are vase and span both early stage startups and more mature fintech companies. Investments peaked in 2018—the same year publishers added “fintech” to the dictionary. That year tallied nearly $40 billion in fintech deals and venture capital financing, representing five times the level of investment in 2014.
Another blockbuster year occurred in 2019, with $33.9 billion invested worldwide across 1,912 deals. The fintech space also includes a number of unicorns, or companies of at least $1 billion in value. Twenty-four new unicorns emerged in 2019 alone. Recent fintechs to achieve this milestone include small business platform Bill.com, challenger bank Chime and real-time settlement technology company Ripple. Fintechs like these are exceeding expectations with their advances in:
- Artificial intelligence (AI)
- Broad solutions
- Collaboration (typically followed by acquisition)
- Digital lending
- Open banking
Fintechs are also maintaining momentum at:
- Engaging big tech
- Blockchain development
- Launching challenger banks
- Innovation for the insurance industry, or “insurtech”
- Regulatory compliance-based solutions, or “regtech”
So far in 2020, COVID-19 has slowed the flow of cash, but analysts expect positive outcomes for the sector, noting many fintechs are well-positioned to weather the current uncertainty. The pandemic has highlighted the importance (and urgency) of digital tools. In the short term, they anticipate investors will continue to support the fintechs in their portfolios, and likely introduce more stringent requirements for new deals.
The evolution of bank and fintech partnerships
The opportunities for both bank-fintech and fintech-fintech collaboration are immense, thanks to a more open and cooperative outlook as the sector matures. The journey of bank-fintech partnerships can be collectively marked by a four-stage evolution:
1. Disruption: In the early part of the last decade, banks viewed fintechs as disruptors. The immediate fear was disintermediation of core financial services and loss of customer relationships to these upstart innovators.
2. Dialogue: The next phase became more productive with between both sides beginning exploratory conversations. Financial institutions realized that with their agile approach and outsider perspective, fintechs could attack friction in the banking system far more easily than mature organizations saddled with legacy systems.
3. Partnership: The current partnership phase began in 2017, with FIs and fintechs competing less and coming together more. Opening banking and the release of PSDII standards helped establish a common foundation for cooperative engagements. APIs and open banking are paving the way and provide faster paths to market. It’s easier to open up the data for a third party to come in and build a solution on it that can be useful to consumers or businesses.
4. Integration: Seamless, interwoven solutions will mark the final phase of bank-fintech partnerships. Banks, third parties and end users are all connected via open standards, with true innovation and collaboration coming to fruition. While the industry has not yet achieved this milestone, panelists certainly see it on the horizon.
An exciting time to explore and engage
Now is the right time for FIs to explore and engage with fintechs as a way to accelerate innovation, improve customer experience and deliver exciting new tools to the market.
While large banks and early adopter FIs are clearly forging ahead with fintech relationships, the time has come for FIs of all sizes to consider their options. Customers – be it consumers or businesses - are looking for their bank to help them sort through the cascading amount of new opportunities and technology that bombards them each and every day. With so many fintech companies in the market, choosing the right engagement model may seem daunting. However, the greatest risk will not come from a failed alliance, but rather from standing still.
Choose the right engagement type
Banks can work with fintechs in a number of different models. Each requires a different level of engagement, investment and due diligence. Common fintech-bank relationships include:
- Accelerator labs
- Pilots and proof of concepts
- Fully integrated partnerships
- White label solutions
Larger FIs typically leverage multiple relationship types within their organizations. They may further break out responsibilities by line of business within the bank, such as commercial or consumer. For example, the bank-owned Early Warning Systems organization was built on industry cooperation and data sharing, making fintech partnerships a natural evolution. Their model identifies promising technologies and looks for ways to integrate them into a broader, more comprehensive portfolio of tools that helps banks, businesses and consumers move money.
Another trend involves banks, fintechs and end customers teaming up to address an industry’s most pressing challenges. There are many benefits tied to this approach, which is coming to fruition in insurtech and other sectors.
A final opportunity includes fintechs engaging with other fintechs in order to build more robust end products.
Culture, scalability and leadership matter
A successful bank-fintech collaboration considers a number of factors:
- Engagement type
- Maturity level
- Cultural fit
- Ability to scale
The right mindset is also critical. External innovation differs significantly from in-house research and product development. Harnessing the right resources at the right times is crucial to success. Many times, FIs struggle to bring the right players in at the right time – and make the mistake of including all parties from day one. But in reality, the timing of when an FI introduces different personalities can really affect the outcome.
A better model starts with a smaller working group of product development, sales, marketing and technology leaders whose role is helping the fintech generate an idea, then nurture it into a seedling of opportunity. More rigorous disciplines, such as risk, fraud, compliance and operations, enter later in the process—well after the idea germinates.
Take a disciplined approach
While there is no single approach to harnessing fintech innovation, robust due diligence is a critical common denominator. FIs must “look under the hood” and ask smart questions as they evaluate potential fintech partners.
FIs looking for new partnerships must be serious and create a real, mature program that includes documented guidelines for various types of fintech engagements. Part of a sound evaluation process is understanding the fintech’s maturity level, use of technology and financial backing. This helps both sides identify potential risk factors and avoid finger-pointing later.
While there are many fintechs that enter the market every year; not all of them survive. A multitude of factors can contribute to a fintech’s demise. They might have a strategic investor that is not aligned with their vision. Or they’re entering the market with a solution with a good margin, but they’re not thinking about the regulatory or compliance perspective of that solution.
Different leadership styles can also affect an emerging fintech’s ability to scale—especially in a highly regulated environment like banking. FIs must factor a fintech’s financial backing and executive team into the due diligence process. It’s important to evaluate the executive leadership team and the skillsets they bring to the table (many times their skill sets will be different).
A good time for collaboration
At the end of the day, end users, whether that is a business or a consumer, are looking for a simpler, easier way and a better client experience. When banks and fintechs collaborate, a better experience becomes possible, and everyone benefits. Customers and end users will be the ultimate judge of who succeeds—and who stays behind. Working collaboratively has captured the current market’s attention for its ability to accelerate solutions, introduce paradigm-shifting innovation and solve complex challenges.
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