“If you can’t beat them, join them.” Seemingly trite, this statement effectively sums up the pragmatic state of relationships between traditional financial institutions and fintech companies. For established banks and credit unions, trying to “outbuild” fintechs on technology is futile pursuit — and unnecessary. Instead, partnerships have become the best way forward.
Attitude Change Required:
Banking institutions have to get over the belief that fintechs are the enemy, out to steal customers and market share. It’s an outdated viewpoint.
While competition exists, this thinking is short sighted for a couple of reasons. First, it assumes that the competitive advantages of banks and fintechs are identical. Second, it puts selling products ahead of customer experience, which is never a recipe for success.
Having worked at one of the largest U.S. banks, I can say from experience that maintaining a “build versus buy” (or in this case, partner) mentality will put a traditional institution further behind. Circumstances continue to shift and there’s increased appetite amongst traditional players to partner with fintech companies. Today, the question isn’t so much about need for such partnerships. It’s more about the strategies and mindset needed to make them successful for both parties.
I have seen many bank-fintech partnerships succeed, and others not pan out. There are many reasons for this. As with all partnerships, these must be approached strategically and with the right objectives.
Here are three ways traditional institutions can ally effectively with fintechs, examined through the lenses of people, process and technology.
People: Partner and Invest with Intent and Commitment
One of the biggest missteps financial institutions can make when partnering with fintechs is to invest in a company or create an accelerator program but then turn around and not actually leverage the technology.
This seems illogical. But it often happens because there isn’t total buy-in or commitment from the stakeholders involved. For institutions to gain the full value out of these partnerships, senior leadership must commit not just to learning, but also to adopting the technology.
I’ve seen firsthand what happens when an institution invests in a fintech company only to lose the benefits of the innovation to another institution, frequently due to lack of a long-term commitment.
Look Beyond the Label!
Today, another traditional bank or credit union armed with several key fintech partnerships is much more of a competitive threat than the fintech companies themselves.
This isn’t to say that every partnership will be exclusive. Part of the value proposition that financial institutions bring to fintechs is that once a fintech establishes a tangible use case with a bank or credit union, it can then go sell to other institutions.
However, it doesn’t make sense for banking institutions to push for a first-mover advantage, whether in tech or channel revenue, and then not capitalize on it. To succeed, fintech partnerships can’t be viewed as pet projects of IT departments.
Those leading the partnerships from the banking side need to get buy-in from the start by the line of business users, as well as leadership across the entire organization. Then, based on viability, they must have a plan to implement and integrate new technology. But beyond that, if the service is something that is customer facing, the institution must have trained people in place to offer and sell the service.
One strategy is to adopt a white-label relationship with fintechs where the bank brands the technology under its own name as a go-to-market strategy and to establish proof of concept with its existing loyal customers.
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Process: Lean into Your Own Competitive Advantages
Fintechs bring much to the partnership table in terms of tech capabilities and innovation. But traditional banks and credit unions also have a lot to offer, based on years of process experience, that should not be forgotten or abandoned. In the same way that fintechs can help banking institutions grow and open new revenue streams, banks and credit unions can do the same for fintechs.
I believe that in another five to ten years, physical branches will be virtually obsolete. The competitive nature of brick and mortar bank locations is vanishing quickly.
Some Banking Legacies Mean a Lot:
Traditional financial institutions have large networks of existing customers, brand recognition and trust, deep expertise on marketing and launching new products, and an intricate knowledge of industry regulations.
Let’s look more closely at regulations. The ability to navigate a complex regulatory environment is a key competitive differentiator that established institutions have when partnering with fintechs. Traditionally, fintechs operated with the mindset of existing outside of regulatory requirements. Yet, with increased risk and regulatory oversight for fintechs, institutions can provide the needed resources to help fintechs scale their offerings in a compliant way.
One step that a bank or credit union can take when partnering with a fintech is to broaden the existing compliance department to establish a Center of Excellence for compliance and data governance that involves cross functional teams.
The goal of this kind of structure is to go deeper than tech integration or channel referrals and get people trained and knowledgeable about how a fintech’s solution fits into the regulatory landscape. This also enables the institution to create a roadmap for ongoing processes and technology needs.
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Technology: Prioritize Core IT Modernization
Even if a bank or credit union has a plan to integrate and implement a viable product or technology from a fintech partner, it could all be moot if its core IT is too outdated to handle it. I have seen this happen.
You Can’t Build on Bad Ground:
Tech can be a barrier to adopting more tech. Financial institutions that have not yet adopted service-oriented architecture or APIs will not be able to leverage many fintech partnerships.
Interestingly, according to Digital Banking Report, transforming legacy core systems ranked at the bottom of importance for digital transformation strategies by respondents. As a summary by The Financial Brand states, “digital transformation is not mere modernization.” But I would argue that digital transformation is not possible without modernization.
Many traditional banks and credit unions are five to ten years behind in technology adoption. Additionally, the average mid-sized bank or credit union doesn’t have resources to fund an innovation group or large IT teams.
Modernizing core systems may require additional outside partnerships with companies that have both deep industry domain expertise and technology. Often, modernization does not require a “rip and replace,” but institutions should still have a plan to not get caught off guard when it comes time to implement a fintech solution that simply doesn’t work with existing infrastructure.
That doesn’t mean banks should modernize for the sake of modernization. Instead, they should prioritize modernizing those capabilities that most closely affect the customer experience across all channels.
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Remember the Ultimate Point about Partnerships
The most important point to remember when considering a fintech partnership is that the true end value must lie with the consumer.
Keep Your Eyes on Partnership’s Purpose:
If your partnership isn’t designed to provide people with a better experience, either through a consumer facing application or improved back-end efficiency, then you are probably wasting your time.
I expect to see an ever-increasing number of banks and credit unions partnering with fintech companies as consumer behaviors continue to shift and financial brands find new ways to reinvent themselves. It’s true that traditional banks can’t beat fintechs on innovation, but they can join them for long-term mutual success.