Challenges with partnerships between fintechs and traditional banks and credit unions are understandable in a world where a financial institution tries to forge a partnership with a fintech from scratch, figuring out everything for itself. But a disappointment they surely don’t have to be.
Solutions exist that make it easier for both sides to participate in building the next generation of financial services. By serving each organization’s needs and simultaneously streamlining what each must accomplish, these partnerships help move innovative — and fully compliant — products to market.
The right partnerships, leveraging full-stack and customizable fintech platforms, eliminate potential roadblocks. Equally important is re-thinking what partnerships look like, and the number of players they involve.
First let’s examine some of the myths in this area.
Myth 1: Financial Institutions Can Build Their Own Digital Solutions
The overwhelming majority of traditional financial institutions don’t have the teams they need to build, launch, and maintain digital banking services, especially when they’re competing with fintech startups like Acorns, Qapital, MoneyLion, and others. Traditional players frequently lack expertise in product design, digital marketing, customer experience, and more. Conversely, the nonbank players built their companies on redefining an experience — and they started with both the people and expertise to do so.
Rather than attempting to compete where they don’t have competitive advantage, traditional players should consider partnering with such fintechs so they can reap the benefits they afford. These include opening new accounts and raising new deposits.
Myth 2: Partnerships Suck Up Time and Resources
Within the traditional model of a bank interfacing directly with a fintech, it’s true that most banks nationwide haven’t staffed teams dedicated to managing partnerships.
But there are solutions that take the onus off of banks and fintechs to do that — essentially, firms that serve as a bridge between the partners. They can speak “bank” to the banks and “fintech” to the fintechs. Everyone wins and no one has to staff outside of their core competency.
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Myth 3: Traditional Institutions’ Culture Clash With Innovative Fintechs
Inertia is a very real phenomenon and no organization can change overnight. That said, having had exposure to many of these kinds of partnerships, I have found a healthy tension that benefits both sides in this equation. Each side can truly rub off on the other.
Fintechs learn much more about regulation and become far more aware of how they should act as responsible members of the financial system. For their part, banks embrace the future of financial services and participate in building innovative products. Building strong relationships between banks and fintechs helps both sides find the middle.
Myth 4: Fintech Partnerships Aren’t Easy
Some say that vendors, consultants or new distribution channels make an easier solution than a fintech partnership. Do they really? Let’s play this out — you’re the average community bank or small credit union. You hire a consultant, go through a long vendor diligence process, and pick a technology vendor at your consultant’s recommendation. You “skin it” to match your bank’s color scheme so you can launch it.
So, you are now at least one year older and $1 million in the hole … for which your institution essentially has only gained a digital version of what it already did.
Your bank technology provider can’t offer you the same level of experience that a fintech app can. The apps are highly customized and tuned, tailored to solve a specific problem for a specific user, whereas the bank technology provider’s user experience is a one-size-fits-all with only some modules you can customize. A desire to improve customer experience may warrant a closer look internally. However, leaning on a fintech partner to create a new experience that consumers are clamoring for is a fundamentally different experience.
In sum, since banks and credit unions don’t have the same product, engineering, design, and marketing resources that fintechs have, evolving on their own means spending money in areas where they’re inefficient. Instead, they could partner with a fintech, reap the benefits of a symbiotic relationship, and have more resources to focus on driving revenues for the bank.
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What About After the Honeymoon Phase?
Fintech partnerships sound all well and good in theory, but, you may be thinking, what happens when the initial excitement and coolness fades, and problems emerge?
It’s a good question — many a partnership has gone awry because of an inability to identify and address problems. What happens after the “honeymoon” ends depends heavily on the structure of the relationship.
Take a traditional one-to-one banking company-fintech relationship, for example. Even though it’s a direct partnership, they aren’t the only two parties responsible for navigating potential challenges, as a given bank or credit union is typically just one of many customers served by a single, large core software provider.
That core provider — neither of the official partners — is the entity that actually controls the systems responsible for critical processes like fraud detection, KYC, payments and more. If something goes wrong, neither the fintech nor the financial institution can directly solve the problem. This can leave the bank powerless to execute on its responsibilities and grinds the fintech’s business to a halt.
But it doesn’t always have to be that way. There’s another model, what I call the “many:many” model for delivering banking services. In that setup, a banking platform sits between the fintechs and the banks.
With that setup, challenges can be solved quickly by the main parties involved on a case-by-case basis as they arise. All involved parties are aligned towards the same mission, and that makes a difference. There’s no need to wait on those controlling legacy processes when you can work together to create a new process that works for all parties involved.
And while a “many:many” partnership may require new processes, once those are built and new routines are set, the marriage can work quite well. The process becomes systemized and repeatable, allowing all parties to iterate even faster. Internal approvals become more efficient, growth accelerates, and all parties become more agile in execution.
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E-Commerce Giant Illustrates the Possibilities
To illustrate the difference between 1:1 and many:many partnerships, think about a service like Amazon.
Let’s imagine you want to buy some golf balls. If you go on Amazon, you can look at 50 different brands sold by 50 different vendors on a single page. You simply select the exact options that work best for you.
What does a 1:1 relationship look like? You go to your local sporting goods store and pick one of the two options displayed. Did you get a golf ball? Yes. Did you get the one that works for your playstyle at the best price? Likely not.
It quickly becomes clear how 1:1 relationships can be far less efficient than many:many.
More partnerships in the fintech world are looking at this many:many model because that’s how you get scale and continuous improvement. When standardization is created, there exists a common marketplace with common tools and documentation.
In the event unique use cases are required, the second “many” becomes key — being able to harness the right partners to deliver what is needed. That’s the way to make scalability an exponential function.
Ultimately, a happy partnership boils down to three things: communication, aligned incentives, and continual improvement. Financial institutions and fintechs that focus on these three ingredients will not only survive the “honeymoon” but also celebrate many “anniversaries” to come.