There is no shortage of buzz around fintech companies and banks collaborating. While the idea can often seem like a match made in heaven, the reality is often far from it. There are several major factors fintech companies and banks should think about before partnering with each other.
Cooperating with a traditional bank or credit union can provide a fintech company with some enviable benefits: deep pockets, a sizeable customer base, a large skilled sales team and access to payment and other restricted networks. There are also reasons why legacy banking organizations may want to partner with a fintech start-up: innovative culture, lack of an outdated mainframe and singular focus.
On the other hand, there are definite drawbacks associated with these very unique entities working together … especially if they aren’t flexible and willing to compromise. Let’s first look at what fintech firms should remember when they are looking to work with banks.
Fintech Must Understand Their Underlying Goals
Fintech firms should never forget or compromise on their long-term vision, no matter how tempting the short term benefits might be. If the goal is to change the status quo and change banking for good, a fintech firm may find it more difficult to do so by partnering with a bank and becoming part of the very system and status quo they set out to disrupt.
Remember that these are the very banks that are worried about the impact the fintech sector could have on their core business – a recent report from PwC found that top banking executives fear that up to a quarter of their business could be at risk from emerging fintech firms (Banks and Credit Unions Frightened by Fintech, March 21, 2016).
Fintech firms also need to be careful not to convince themselves that partnering with a bank is a short-term means to an end. It might not seem like it to begin with, but partnerships with banks tend to be very involved and demanding. They can’t underestimate this factor.
They also need to be careful that something they hoped would only be temporary does not become a permanent situation. Partnering with banks requires the allocation of significant resources and that can slow down the whole aggressive, fast start-up dynamic which is what drives innovation and success in this sector in the first place.
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Fintech Must Understand Scalability
In the case of a mobile payments solution for small businesses, the key to success is having a large network of businesses using the product and platform. To win a large number of SME customers requires a large, skilled sales team and doing so from scratch – while not impossible – is a huge undertaking, expensive and time consuming.
Partnering with an existing financial institutions can decrease the time to market and the costs substantially by leveraging not only the bank’s existing customer base, but also its skilled and experienced sales teams.
The drawback? Exclusivity and potential conflict of interest if the bank has its own POS terminals and having hands tied if the bank’s sales team does not perform as expected. While medium-rate growth in a single bank fintech partnership is more likely, disruptive, high-rate growth may be more difficult.
Fintech Must Understand Scope
Fintech companies must consider how many parts of the value chain they need to capture in order to be successful. In the case of those developing new technology for specific parts of a more extensive value chain, the proposition of partnering with a financial institution is much more appealing.
For instance, in the biometrics space, the use of a bank’s customer validation process is very appealing since collaborating impacts only one node in a large chain that encompasses the customer value proposition. Bottom line, it is difficult in these scenarios to ‘go it alone’.
On the flip side, let’s look at what banks need to consider before working with a fintech startup.
Banks Must Understand the Impact of Partnering
The fintech partnership benefits for the banking industry seem obvious – the industry is traditionally slow to innovate and collaborating with a smart start-up to use their cutting-edge technology can be a faster way to create a new competitive advantage in an increasingly digital market.
The banking industry needs to look at the bigger picture and properly access the long-term impacts of a partnership or acquisition.
- Will the collaboration cannibalize an existing product or service?
- What will the impact be on the specific market segment if a banking firms decides not to partner?
- What is the likelihood that a specific fintech platform or solution will continue to be used?
Banks Must Understand Partnership Options
When considering partnering with a fintech startup, banks should consider the ‘build vs. buy’ options. Banks need to be careful and realistic about their internal capabilities, and to account for the time and costs to produce a high quality solution.
One important area where fintech firms are especially good at, and banks have difficulties with, is iterating a product until finding the right solution that fits market needs. For most banks, a product tends to launch only after a long build process.
For a fintech startup, a product can be launched and continuously improved until it’s right for the market. When considering innovating within the company, banks should plan for continuous improvements to their product.
Alternatively, there may be times when it may be a much easier solution to acquire a fintech startup and weave it into a bank’s existing technology. In this case, banks should closely examine the robustness of the new technology solution to ensure it meets security standards and other necessary criteria and to be cognizant of the regulatory environment.
Bringing on an outside solution and incorporating it into a bank’s current capabilities takes significant resources which may exceed the cost of building internally.
Banks Must Understand Culture Compatibility
Due to the ephemeral nature of many startups, banks should also evaluate the track record of the teams they are looking to collaborate with on many levels. Are the startup’s founders serious about building a great, lasting product, or are they in it for the short term?
In addition, is the company likely to withstand stakeholder pressure and does it have a stable capital structure? It can also be easy to overlook the importance of culture fit, but in order for executives from both sides to work together in a productive way, it is crucial to build a solid relationship between companies.
Overall, fintech startups and legacy banking institutions should bear one vital premise in mind: avoid unnecessary dependence on each other, and if there is no way around it, be careful to limit your collaboration to what is absolutely necessary. Both parties need to anticipate how it might become more complicated than originally thought and mitigate the potentially negative impact that comes with collaborating with firms that are often very different from their own.