For years banks and fintechs have eyed each other warily or downright belligerently — like wrestlers sizing each other up. The fintechs strive to disrupt the market, beat “old school” banks and grow in scale. Banks and credit unions view fintechs as ambitious startups run by 30-year-olds awash in investor money who know nothing about the “real” business of banking.
That dynamic still exists, to be sure, but whether out of survival or a strategic need, traditional institutions and fintechs are now joining forces like never before. “I think the overall fear of fintechs continues to grow. Just the shape that it takes and what effect it has on their strategic decisions has changed a lot,” Peter Wannemacher, Principal Analyst of Digital Banking at Forrester, tells The Financial Brand.
Research by Cornerstone Advisors found approximately half of surveyed banks and two out of five credit unions said they had partnered with fintechs within three years. This collaboration includes everything from full partnerships to vendor relationships to mergers and acquisitions.
Why it Matters:
There’s an urgency now to joining forces due to the speed of change and competition for the best partners.
“What we are getting to now is a place where the conditions are ripe for much more mutually beneficial long-term partnerships,” says Alex Johnson, Director in Cornerstone’s Research and Fintech Advisory practice, in an interview. “Most financial institutions now realize they have to be involved in the fintech ecosystem.”
Both sides of the aisle are recognizing there’s an urgent need now to partner up before they end up without a seat at the table. Banks and credit unions need to acquire fintech companies before they get so big they can no longer afford them. And smaller fintech companies need to partner with traditional institutions before their competition does.
The Bank Administration Institute also notes that the “us against them” mindset between banks and fintechs has been “evolving into more nuanced relationships.” While traditional financial institutions still view fintechs as competition, there’s acceptance that they need some of their services.
The trend is mainly surprising in that it didn’t occur sooner. Consumers still trust traditional banks but also demand more digital services, so both ends of the spectrum are having to meet in the middle. Even with cool technology and a growing customer base, many fintechs lack the brand and infrastructure of traditional banks. At the same time traditional banks lack the technology or agility to meet consumer’s growing digital demands.
“Fintechs need the ability to pretend they’re a bank when they’re not. FDIC insurance, partnership into the debit card processes, all of the regulatory compliance that comes with that stuff. That is where I see partnerships being built,” Gabe Krajicek says in an interview.
That has manifested itself in the rising number of Banking-as-a-Service arrangements in which about 15 financial institutions provide access to the banking “rails” to a growing list of fintechs and neobanks (such as Chime’s partners, The Bancorp Bank and Stride Bank).
Joining Forces and Blurring the Lines
The collaboration comes at a time when growth rates for some fintechs are slowing, forcing them to find new revenue streams. If their business model is based largely on fees, especially interchange, that may not be sustainable. One trend is to continue to build their B2C business unit while they pivot to become a B2B provider and white label their software to banks.
While these bank-fintech partnerships can vary, the most successful ones usually have clear strategic intentions, says Wannemacher. For example, Chase entered into an agreement last year with Greenlight, a fintech created a debit card for kids to help parents teach their children about money and finance. Since then, Greenlight has set up accounts for more than three million families who have saved more than $120 million through the app.
Other banks are also partnering with fintechs, but for more internally focused reasons. U.S. Bank, for example, looks to fintech companies for everything from reducing the risk of identity fraud to helping improve the credit decisioning process. The bank doubled down on the concept by taking a stake in two fintech venture capital firms.
The big bank noted it is often simpler and more economical to integrate fintech into its own operations than to build in-house capabilities. U.S. Bank also acquired Bento Technologies and has had partnerships with Securrency, Akoya and Lumint. “We’re active in all areas within fintech,” says Davis Ness, Vice President of Innovation R&D.
Parity for Community Institutions
Smaller banks and credit unions are also increasingly looking to fintechs to add new capabilities. Kansas City, Mo.-based Lead Bank, with $750 million in assets, tapped Finzly to implement a cloud-based payment hub to enhance its payment capabilities. Finzly’s payment hub supports everything from ACH to Fedwire and SWIFT through a single, consolidated system, making it easier for small banks to offer seamless payments. The relationship helps the bank quickly expand its payment capabilities, notes Sheila Stratton, Lead Bank’s Director of Digital Strategy.
Data sharing can be a stumbling block in partnerships between banks and fintechs, as financial institutions face additional scrutiny.
While such relationships offer opportunities, they are not without challenges. As banks are often cautious about sharing information, some of the biggest fintech partnering issues revolve around integration, compliance and data sharing, Peter Wannemacher observes. Regulators have been taking a closer look in recent years, and in July 2021, the Federal Reserve, the Comptroller of the Currency and the FDIC issued proposed interagency guidance for these relationships.
The Future of Partnerships
Analysts believe the lines between traditional financial institutions and fintechs will continue to blur over the coming years. While many banks and credit unions are eager to get a hand in the fintech game, many don’t know where to start, says Gabe Krajicek, points out. What has been successful for some are vertical acquisitions and integrations where a fintech buys a bank. For example, Lending Club acquired Radius Bank for $185 million. And the founder of fintech startup M1 Finance acquired the tiny First National Bank of Buhl.
As described in a separate article, M1’s CEO Brian Barnes, who bought the bank himself, not through the fintech, will be investing in the bank’s technology capabilities to turn it into a leading Banking-as-a-Service provider.
It’s important for both sides to have a clear understanding of who will be the primary financial institution.
While bank-fintech partnerships grow more numerous, they don’t always produce the revenue they could, according to Cornerstone Advisors. In many agreements, the bank ends up being the back office utility provider of regulatory compliance and the balance sheet while the fintech runs the marketing campaigns and gets consumers to use the product.
Kasasa’s Gabe Krajicek believes financial institutions will become niche payers in certain types of assets. What banks and credit unions need to consider is the long-term monetization strategy of the partner they are getting in bed with, he stresses.
“When you’re bringing a fintech in, if their long-term goal is selling to that customer over and over again, you really don’t have any strategic value in that customer if all your are getting is a loan,” Krajicek maintains.
In addition, he points out that payment-related fintechs that are also seeking to add checking accounts could end up in direct competition with the financial institutions they are working with. “The solution,” says Krajicek, “is to look for a fintech that wants to make you the primary financial institution where they play a role that is ancillary.”