The Foolish Fantasies of Fintech/Bank Partnerships

In the past two weeks, I’ve attended three conferences (yes, I have a rough job). There must have been at least seven or eight sessions across the three events that addressed the topic of partnerships between fintech startups and banks.

My, how things change. It was barely a year ago that fintech disrupt-o-mania was in full force. One McKinsey consultant wrote:

“Consumer banking is being unbundled — a bank is being broken up into its key activities, and products are emerging which do those key activities better/cheaper than banks.”

Another pundit claimed:

“Thousands of startups are coming in and disrupting the distribution and the experience, and it’s just not possible for banks to survive this transition.”

Oh really? Seems to be that it might just be the other way around — fintech can’t survive without the banks.

The Partnership Parade

Calls for partnerships are in full force. Recent headlines include:

  • Big Banks Balance FinTech Startup Partnerships With Internal Innovation (Wall Street Journal). One consultant is quoted as saying “Banks are smart to work with FinTech startups while at the same time searching separately for ways to compete against them. It’s a delicate balance and they have to think like a tech company.” <-Nonsense. Last thing a highly regulated, risk-bearing firm needs to do is “think like a tech company.”
  • Advice to Fintech Firms: How to Partner with Banks (Finextra). The author writes, “Most [fintech] companies will call themselves partners rather than vendors. There may in fact be a case for being a vendor (there is less long-term reward, but also less overhead). Yet, if Fintech firms are to be a part of the transformation of banking, they will do so as partners.” <-I don’t get why there’s “less long-term reward and less overhead.”
  • Community Banks Clamor for Fintech Partnerships (CNBC). According to this article, “smaller traditional firms find themselves struggling against new online regional banks, making partnerships with fintech start-ups crucial.” <-New online regional banks? Huh? Like who?
  • The Great Fintech Convergence Leading to Partnerships with Small Banks (Daily Fintech). Here’s the link to this article. YOU can try to figure out what the author’s point about partnerships is. I couldn’t make heads or tails of it.

Man oh man, when a meme gets going in fintech, everybody jumps on board, eh?

If you actually read the articles referenced above, you’ll find no specific references to bank/fintech partnerships, except in the WSJ article, which mentions a partnership between a European bank and a startup.

Not that there aren’t examples. A number of regional and community banks have “partnered” with Lending Club to boost their loan volume, and Chase has “partnered” with OnDeck in the small business lending space.

Partnership Delusions

But are these really partnerships?  The author of the Finextra article says:

“Without shared vision, values, and goals, there can be no partnership.”

Spot on. I would add “shared risk” to that list of partnership criteria.

In light of this list of criteria, do the so-called partnerships really qualify? The Lending Club example fails the test, miserably.

Following the lending marketplace’s recent woes, Richard Swart, perhaps the preeminent expert in alternative finance in academia, said at the 2016 Banking Growth Forum, that he expects that for at least one quarter, banks will refrain from putting any capital in Lending Club.

Shared risk, my foot. Banks aren’t partnering with Lending Club, they’re simply using it as a distribution channel.

Then there are the fintech vendors who (knowingly and willingly) use the phrase “partner with” when they really mean “sell to.”

Partnership Realities

The Banking Growth Forum also included a session called a “pitch-a-palooza” in which fintech startups presented to the bankers in the audience, with the hope of securing partnerships.

There were some really worthy fintech firms presenting. Apparently, my perspective is nowhere close to the bankers’ take. One startup pitched a bank account for kids, giving banks “the opportunity to target their customers’ children.” As I sarcastically tweeted: “Just what I want as a parent. My bank targeting my kids.”

After the slate of startups presented, a vote was held, and sure enough, the kids’ account startup got the most vote. Good job bankers!

Let’s inject an ounce of reality into this discussion, shall we?

Let’s say a bank partners with that startup. What’s the real economic impact on the bank? I doubt it can even be measured.

Even if a bank were to partner with 10 of these startups, the economic impact over the next two to three years will be minimal, at best. It could be five to 10 years before any meaningful impact emerges.

But how much work is involved on the part of that bank to partner with 10 startups? If we’re really talking “partnership” here, then we’re talking about tight integration, not just technologically, but business process-wise. Business processes including marketing, sales, and customer service.

It’s hard enough for a bank to do that with one partner, let alone 10.

And for what?

I (half-jokingly) refer to what’s going on in fintech as featurization. Meaning, that what many (if not most) fintech startups are offering are not financial solutions, but simply features that are little more than add-ons to existing products or solutions. For example, firms like Debitize, Digit, Qapital, and Acorns all must link into existing checking or savings accounts.

There’s no question in my mind that a bank could partner with these firms to add new services — and more importantly, value — to its customer base. But monetizing that relationship will require new approaches to pricing the core account and the add-on services. Good luck with that, Sparky!

When you do the math, you find that any one feature (or startup) is, at best, only going to apply to a small percentage of the customer base. Which means that the profit potential from any one partnership is very small.

Platforms, Not Partners

What banks need to create are platforms — not partnerships.

When Jim Marous (co-publisher of this website, and publisher of the Digital Banking Report) approached me last December to contribute to his annual trends and predictions article, my contribution was:

“The most significant trend of 2016 will be the ‘platformification’ of banking, where both existing banks and startups begin a strategic shift towards becoming banking platforms, much like how Amazon is a platform in retail.”

I was wrong, of course. At best, the trend will be the discussion of platformification, not the actual building of a platform.

What is a platform? Plaformed.info says:

“A platform is a plug-and-play business model that allows multiple participants (producers and consumers) to connect to it, interact with each other and create and exchange value.”

Please note that the word “partner” appears nowhere in this definition. Participants need not be partners.

In order for banks to truly capitalize on (i.e., monetize) the fintech explosion, they need to develop platforms that easily allow a large number of fintech startups to plug in.

Partnerships require far too much effort, and can only be done with a limited number of companies. Platforms, on the other hand, enable a much greater level of scale.

The Slow Road to Platformification

I know some of you hate the word platformification, thinking it’s yet another stupid, ugly consulting-generated word. Come up with a better term, and I’ll be happy to use it.

My favorite example of a successful platform is Amazon. The evolution of Amazon’s platform strategy is instructive for banks. Amazon spent the better part of its first 10 years in existence in becoming a B2C eCommerce destination. Started with books, and then moved into other products.

In 2006, Amazon launched AWS, its web services offering for other businesses. This was the start of building out its B2B eCommerce infrastructure.

From about 2011 through now, Amazon has leveraged the two prior stages of its existence to becoming a true B2B2C commerce platform (please note that I dropped the “e” in front of commerce).

The challenge for banks is that to monetize the fintech opportunity — at any level of scale — requires them to first become more of a consumer destination, and to build out a set of services for the fintech providers to connect and integrate.

BBVA is doing the latter with its API marketplace, for example. But few (if any) banks are nailing the former, and becoming a financial services destination for anything more than its existing customers checking their account balances and transferring funds between accounts.

David Brear and Pascal Bouvier published two great articles here on The Financial Brand on banking-as-a-platform, with a technical discussion of what it is and how to build one — from a technical perspective. Unless I missed it, however, there was no mention of how long it would take a bank to become a platform (not just to build one, but to become one).

It’s taken 20 years for Amazon to become what it’s become. It’s going to take 10 to 20 years for any bank to build and transition to a platform strategy.

It’s more probable that Amazon itself will do it faster, and banks will end up plugging into Amazon’s platform. That’s not a bad place for a lot of mid-sized banks and credit unions to be, but not a good place for the large regionals and megabanks.

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