2016 was supposed to be the year traditional banks and startups began to work closely together as partners. Over the last two years, financial institutions seem to have accepted that partnership with fintech companies offers a potential path to new markets, new products and growth.
While a few traditional financial institutions continue to view fintechs as pure competition, there is a broad realization that the way customers and businesses consume financial services is changing faster than banks are able to adapt—especially while maintaining focus on a premier experience for full-service banking customers.
Failure to adjust to changing expectations and preferences will result in falling behind the market while more nimble, non-traditional players poach current customers and dominate the attention of the next generation of account holders.
The interest in partnership is mutual. Fintech investment remains strong and customer acquisition is accelerating. Even while the OCC continues its progress toward making special-purpose national bank charters available to fintech companies, at present very few seem interested in or even capable of acquiring them. Fintech companies are focused on developing software and creating great experiences, and look to banks to simply provide the banking services. Clearly, opportunity for partnership exists. So, where are the partnerships.
The first obstacle to partnership is a cultural disconnect. Fintech companies are trying to disrupt the market. They want to do things better, faster and cheaper, or meet an untapped need in the market. They focus on simplicity for the user, automating routine tasks and using artificial intelligence, machine learning and gamification to build a tight, often-addictive bond with their users.
Financial institutions, on the other hand, ARE the market, and full-service banks and credit unions are the institutions struggling to meet the untapped need. The tightest bond with a full-service customer these institutions share is built around a menu of transactional services delivered by a personal interaction with a human banker. As a result, financial institutions and fintech companies often talk past each other about their goals for the partnership. The fintech company may not value all the things the bank does well, and the bank may not understand why the fintech wants to keep the bank at arm’s length from their mutual customer.
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The second obstacle is the banking technology with which the fintech must integrate. Fintechs typically build their services by assembling off-the-shelf, low-cost development tools and data sets, then inject their particular secret sauce to create something new or different. They build, test and iterate very quickly to find a niche or “fail fast and fail cheap.” Banks and credit unions, on the other hand, rely on legacy solutions that require extensive lead time and a rock-solid business case to justify the steep cost of “innovation.” This often means that what the fintech wants to do is impractically expensive for the FI or takes too long for an FI to deliver, and the workaround is unacceptable.
Take, for instance, a goal-based savings app that leverages demand deposit accounts and debit card capabilities offered in conjunction with a community bank. The fintech app is the product and the brand, but the bank is the service provider. This would be extremely difficult to do in the traditional model. Would the fintech be successful if it linked a new customer to the bank’s website, where he or she went through the bank’s online account opening process, was issued a bank card and began to use its online banking platform?
All those things are good experiences in the context of a full-service banking relationship, true, but what value do they have for the fintech, and how would that model support the partnership? Simply put: It wouldn’t. Fintechs must stand “alone” with their partners in the background, providing the banking “plumbing” on an API for the app to deliver the experience the fintech is attempting to create for the customer.
To make partnerships like this one work, traditional financial institutions must become service providers. They must align interests and risk, but their risks need not be mutual or proportional. For the partnership to work, it has to be easy for the bank to support, easy for the fintech to use and cost-effective for both. The model must evolve from a traditional, high-touch, shared-risk partnership that leverages the full-service processes and portfolio of the bank to one where the bank provides plug-and-play infrastructure for fintech companies that is cost-effective, quickly available and easy to connect to. Perhaps most crucially, the model must be distinct and separate from the legacy systems of record, allowing financial institutions to insulate the existing full-service bank from financial risk and operational disruption.
Banks that are serious about partnership with fintechs will make a cultural shift to separate the full-service bank from the self-service partner channels. They will seek out technology partners that provide immediate access to developer tools and open APIs, and they will offer banking-as-a-service that is scalable and which offers an economic model that makes accounts of all sizes profitable.
As VP of business development for Q2, Rahm McDaniel is passionate about empowering traditional financial institutions with the tools for innovation. His 18 years of high-tech experience include 12 years in various senior roles at Hewlett-Packard and the co-founding of Ideagility.