When fintech first emerged several years ago, its pioneers often positioned themselves as disruptors of traditional banking.
In some ways this was true, but it soon became apparent that both camps needed one another.
Because the vast majority of neobanks and fintech companies aren’t licensed to take and hold deposits, they needed to partner with banks to provide banking services that customers expect, such as personal loans or FDIC-insured savings accounts. They often referred to banks as their “sponsors.” For their part, banks needed fintechs to provide customers with state-of-the-art technology and convenience.
There have been thousands of these partnerships in recent years. Surveys find that between 65% and 70% of all U.S. financial institutions have partnered with fintech companies. In 2022, Cornerstone Advisors’ annual survey of banks and credit unions declared that fintech was for the first time the “primary driver of growth” for financial institutions, overtaking mergers and acquisitions.
These partnerships can be powerful when they work. Maine’s Bangor Savings Bank partnered with the fintech giant Fiserv to provide customers with easy ways to program payments between different cards, to maximize rewards points and other incentives. The partnership recently won a Celent Model Bank Award for effective integration.
But the fintech-banking path is not always smooth.
When Fintech Partnerships Falter
A 2023 Ernst & Young survey found 40% of bank-fintech partnerships “fail to operationalize,” and other surveys indicate even those partnerships that do manage to launch end up disappointing one or both partners. Now there is reason to believe that failure or disappointment may become more widespread. When such partnerships first began, fintech companies were turbo-charged by billions in venture capital, with go-to-market and growth as their top priorities. But after hitting a mid-pandemic high-point in 2021, fintech funding has dramatically contracted — a 40% year-over-year funding decline from $92 billion to $55 billion, according to a 2023 McKinsey report.
With investment funds drying up, there is much more pressure on fintechs to prove their long-term viability. According to a 2023 report from Silicon Valley Bank, “the higher cost of capital is now putting pressure on fintech companies to adopt more profitable practices or, in some cases, completely pivot to new revenue sources.”
That sentence should be a red flag to banks who have put fintech partnerships at the center of their growth strategies. Will your plans come undone if your fintech partners fail, close, merge or pivot?
Learn more about making a fintech partnership successful:
- How Banks and Fintechs Can Get the Best Results from Partnerships
- What To Know About Washington’s New Guidance on Partnerships
What Is In A Successful Fintech Partnership Now?
Some changes are already visible. Instead of seeking a sponsor bank to offer basic services, today’s fintech companies increasingly want to partner with multiple banks to acquire new customers. But this can have the effect of diluting the effectiveness of any given partnership for a bank, and may give fintech companies incentives that run counter to their early relationships.
Another fault line is increasing complexity. The early days of bank-fintech partnerships were fairly plug-and-play: fintech companies basically provided white-label services to banks. “That’s how you, as a consumer, experienced banking, and there was a certain cadence and longevity to it,” explains Niranjan Ramaswamy, vice president of Open Finance & Banking Hub at Fiserv.
Today’s relationships can be much more complex, however, from embedded banking to wealth management tools. This complexity makes both establishing and maintaining partnerships a more time-consuming and painstaking task, one that also involves much higher risk than in the past. Fintechs that are deeply intertwined with a bank’s day-to-day operations can prove to be an existential threat if they suddenly fail or change business model.
“The higher cost of capital is now putting pressure on fintech companies to adopt more profitable practices.”
— Silicon Valley Bank report
Finally, the regulatory setting is changing, too. The Consumer Financial Protection Bureau (CFPB) will in 2024 implement “open banking” regulations, designed to create competition among financial service providers by making it easier for customers to access and transfer their financial data. This creates new demands on customer service and maintenance, as well as on data security. Moreover, in October 2023, the CFPB has also proposed regulating large fintech companies, which would presumably require greater compliance efforts all around.
So in this increasingly risky minefield of partnerships, what can banks do to maximize their chances of success?
Banks and Credit Unions, Take These Precautions
The first step is to understand that the cultures of banks and fintech startups are fundamentally different. Banks are highly regulated, and therefore staffed with leaders who are often inherently conservative. Fintech startups on the other hand are typically driven by growth, staffed with programmers and product managers — and backed by investors who are not parties to (and may not value) their fintechs’ banking relationships.
The key decision-makers and the most relevant teams in the two organizations have very different job titles and skill sets, as well as attitudes to growth, stability and risk.
For these reasons, it is essential that both sides establish their goals and expectations from the very beginning of the partnership. “It’s important for the bank to communicate from the outset,” advises Nick Rosenberg, executive vice president, head of Global Payments Group at New York’s Metropolitan Commercial Bank. “What is important, what are the expectations? That really helps to avoid challenges down the road.”
Similarly, banks need to establish robust ties of trust with any potential partners. “We want to know their management team,” Rosenberg says. “They’ve got to be experienced, got a strong management team, not somebody in the garage.”
Perhaps the biggest thing a bank can control is how much effort and how many bodies it’s willing to dedicate to its partnerships. The 2022 Cornerstone report found these efforts especially lacking. According to the firm’s Ron Shevlin, many banks don’t devote sufficient personnel to managing the partnership.
“Just over half of all financial institutions have no personnel dedicated to financial partnerships. The institutions in the $1 billion to $10 billion asset range with dedicated personnel average about 2.5 full-time equivalent staff members,” Shevlin says. “How many partnerships can an organization identify, vet, negotiate, and deploy with 2.5 people?”
Despite current challenges, bank-fintech partnerships are likely to continue to grow. And McKinsey remains optimistic about the fintech sector even as it matures, expecting revenues “to grow almost three times faster than those in the traditional banking sector between 2022 and 2028.”
It’s important to recognize, though, that the days of plug-and-play may be long gone.
About the author:
James Ledbetter is the editor and publisher of FIN, a Substack newsletter about fintech. He is the former editor-in-chief of Inc. magazine and former head of content for Sequoia Capital. He has also held senior editorial roles at Reuters, Fortune, and Time, and is the author of six books, most recently “One Nation Under Gold.”