How FinTech Partnerships With Banks Shape the Future of Finance
[UPDATE: check out the latest follow-up on partnership trends here - “The Rise of FinTech Partner Banks”]
The rapid pace of innovation in the financial services industry has become well-known in the last 10 years. Technology-driven startups continue to emerge and mature, and established financial institutions continue to invest significantly in offering the latest digital capabilities. The FinTech trend in 2019 of both sides working together through partnerships has evolved to a popular industry practice that will impact and shape the finance industry for years to come.
SUMMARY
Due to multiple trends in consumer banking, FinTech companies arrived as a disruptive force in the financial services industry, looking to eliminate the dominance of established banks;
The theme of disruption has evolved towards collaboration, as a new FinTech trend of partnerships between financial institutions and FinTech companies has evolved, gaining tremendous benefits on both sides;
The framework for a successful FinTech partnership with banks involves strong alignment in strategic goal / plan, establishing common ground, building and scaling the joint venture, and implementing success metrics for the partnership;
The models for FinTech partnerships are: SaaS (software-as-a-service), Referrals, and Outright Purchase; other alternatives gaining popularity are Co-branding, Bank-to-Bank, and FinTech integration services.
From the ashes of the Financial Crisis (of 2008 - 2009) came the belief that agile, innovation-focused financial technology companies (fintechs) would completely disrupt the financial services industry and remove established financial institutions from their leadership position. Despite the power of technology, fintechs have not replaced banks in financial services, but do directly threaten institutions that are slow to change, unwilling to adapt, or unaware of a consumer’s evolving preferences.
In the last 5 years, the view of disruption has completely changed to collaboration — banks and fintechs working side-by-side as partners toward a common vision. In 2019, this FinTech trend of both sides teaming up and continuing to partner in the future for a mutually beneficial relationship, is completely changing the dynamics of the financial services industry. There are multiple FinTech and bank partnership examples across business sectors globally to showcase this movement.
Adding to the mix Tech giants (such as Google, Apple, Facebook, Amazon) and their influence on the pace of innovation, also intensifies the pressure for FinTech companies, who were the original innovators of the next financial revolution.
In order to stay viable, competitive, and relevant, banks and fintechs should continue to partner with one other in some form, since it has tremendous impact on long-term growth for both sides, but only if the overall partnership strategy and goal(s) is in clear alignment.
FROM DISRUPTION TO collaboration
Financial institutions have had to modify their approach to business from product-centric to customer-centric based on the fallout from the Financial Crisis. Consumers felt that big banks had taken advantage of their deposit relationship with unfair fees, rigid policies, and lack of progress towards personal financial wellness. Traditional business models were being challenged to evolve towards an experience that clearly benefited customers due to multiple trends such as:
Changes in consumer behavior: Customers became more willing to access, view, and perform financial transactions online because it was quick, convenient, and saved them on unnecessary costs (such as overdraft and monthly service fees);
Advances in cloud-based technology: Customer-initiated transactions were able to be executed in real-time for processing and clearing, which helped enhance digital capabilities available to users online;
Power and availability of mobile devices: The evolution of mobile devices, especially app-based smartphones, conveniently brought banking from a desktop to a customer’s pocket.
FinTech companies were able to have early industry success by taking advantage of these technology-driven trends to deliver solutions that captured the attention of consumers who were dissatisfied with financial institutions. Conversely, banks were slow to drive technological change internally due to legacy organizational and cultural hierarchies.
Despite the growing popularity of these newcomers, the overall market share of fintechs (in comparison to established institutions) has been small. Customers have chosen to maintain their long-standing relationship with the trusted branding of banks, but still yearn for these older institutions to deliver the latest capabilities that nimble fintechs offer.
Banks are constantly evaluating improvements to services and offerings for their large customer base. FinTech companies are consistently trying to establish themselves in the long-run as strong providers of financial solutions through ongoing, quality usage and customer activations. Ultimately, both institutions and FinTech companies are focused on increased market share growth that can clearly come from a successful FinTech partnership with banks.
THE BENEFITS of fintech PARTNERSHIPS
The broad need for financial institutions and FinTech companies to come together is clear. Financial services leaders agree with this need as 82% of executives at top institutions surveyed, intend to partner with a financial technology company in the next 3 - 5 years.
The greatest value-added benefits for banks when it comes to partnerships are:
Ability to collaborate with FinTech companies to form a solid structure of improvements towards innovation;
Continuously engage their long-standing customer base with advanced, digital options;
Quickly improve the customer experience through the agility and new insights from fintechs.
Overall, financial institutions are able to provide newer services efficiently without added risk or increased operating costs (such as staffing) when they partner — leading to the potential for significant increases in revenue.
Financial technology companies are also able to benefit from bank partnerships through:
Exposure to a large volume of loyal banking clients and their data;
Deep experience (from banks) on how to handle a complex regulatory environment;
The ability to reach new markets and customer segments, and scale quickly.
For FinTech companies, being able to access established customer segments that are loyal to financial institutions, and lean on the bank’s experience of working in a highly regulated environment — leads to sustained growth and relevancy in a crowded, competitive ecosystem.
FRAMEWORK of success in fintech PARTNERSHIPS with banks
Despite the tremendous advantages and benefits on both sides, not all banks and FinTech companies should partner with one another. Poor alignment in a partnership can quickly lead to lackluster relationships that reduce overall performance in revenue and customer experience. Without a one-size-fits-all approach in the industry, each partnering side must be evaluated thoroughly.
The important factors in a framework for implementing strong and successful FinTech partnerships with banks are:
Alignment in strategic direction — being able to mutually agree on areas to focus improvement efforts, such as customer experience, new capabilities, or new customer segments. Key questions to consider in identifying this strategy are:
What are the best market opportunities?
What value creation strategies are likely to be most successful?
Which strategies best align with the bank and fintech’s overall strategy and capabilities?
Which partners have the best prospects to be successful?
Establishing common ground — having shared values between both financial institution and FinTech company is a great indicator for alignment.
EXAMPLE: increasing regulatory compliance and deterring fraud for an enhanced customer experience, is an area where strong partnerships between FinTechs and banks have flourished. The overall objective is clear and easily matches with both sides; industry innovation and added risk controls are a definite WIN-WIN.
A strategic plan to scale and adjust the partnership — effective partnerships should be able to adapt quickly to industry dynamics, internal company changes, and changes in customer demand. Making timely corrections based on data and performance are most important, especially when it comes to delivering a customer experience that builds and deepens loyalty.
Implementation and measurements for partnership success — a joint program that details vision, process, and specific goals towards educating both teams efficiently, without an added workload, is critical.
Avoiding cultural pitfalls — expecting banks to be instantly innovative after starting a new partnership (or only emphasizing a product / service) is misleading and an example of the wrong partnership expectations.
fintech and bank partnership EXAMPLES
As complex as this general framework may seem, there have been numerous FinTech partnerships with banks in the last two years that have shown early signs of success:
Tandem Bank + Stripe
Tandem Bank is a digital-only bank in the UK that partnered with Stripe (the largest fintech by valuation) to deliver a new auto-save feature;
JPMorgan Chase + Plaid
PNC Bank + OnDeck
OnDeck is a digital lender that is helping PNC offer online loans to small business, which traditionally is a difficult sector to penetrate — especially with newly formed entities;
American Express + GreenSky
Both companies teamed up to offer improved point-of-sale lending technology, which gives consumers multiple purchasing options seamlessly.
With the growing popularity of FinTech partnerships with banks globally and the continuous wave of new industry players, financial institutions must be able to skillfully develop how to drive effective, mutually beneficial partnerships. Some critical best practices in building this new skillset are:
Assessing internal capabilities;
Evaluating and vetting potential partners;
Establishing mutually acceptable and profitable partnership agreements;
Testing and scaling new approaches;
Evolving from the initial partnership agreement to new arrangements.
types of fintech PARTNERships
With an understanding of the benefits and framework for successful partnerships, and some recent Fintech and bank partnership examples throughout the industry — we can take a look at the different structures of FinTech partnerships with banks and how they benefit both organizations.
SaaS (Software-as-a-Service) — FinTech companies license or sell their technology to financial institutions in a white-label offering that involves banks branding the product to offer an end-to-end solution.
BANKS: Avoid costly infrastructure or in-house development costs in iterating innovative products, but still keep control of the customer lifecycle and journey;
FINTECHs: Obtain low-cost funding through a trusted partnership that is familiar with the regulatory environment (through the bank’s infrastructure);
Referrals — Banks refer clients to relevant FinTech companies to plug gaps in their own service offerings, such as the needs of specific customer segments (i.e. “unbanked”, “underbanked”). In the UK, banks must refer business customers that they can’t help to alternative providers (e.g. British Business Bank has multiple formal referral programs with fintechs). The lending sector is a very popular area for referrals as FinTech players are able to offer faster onboarding, processing, and approval, lower cost products, and alternative credit sources.
BANKS: Able to improve the customer experience of more client segments, and gain referral fees as additional income;
FINTECHs: Benefit in having a constant flow of revenue from a loyal customer base (especially helpful for younger startups looking for viability);
Three different models for referrals:
Outbound referrals of bank clients whose needs are not being met to FinTech companies who have the infrastructure and products to better serve them;
Inbound referrals of FinTech clients that have already been onboarded into a product, to banks for servicing or maintenance; a popular option for the lending sector, in which fintechs originate a loan and then sell it to a bank;
Co-branded models in which banks and FinTech companies cross-sell each other’s products.
Outright purchase — Banks purchase the rights of the technology or completely buy out the FinTech player; this is not a common industry approach but it is starting to pick up in consideration;
BANKS: Gain exclusive rights to the technology which could offer a competitive advantage, expansion into new markets, or a new customer segment;
FINTECHs: Being acquired into an established bank’s ecosystem grants access to new funding sources for product development, and market expertise for future product market launches. It’s also a strong exit strategy for founders.
There are alternatives as well to these partnership structures, which have started to grow in popularity.
Co-branding is a strategy both for fintechs and tech companies outside of financial services to reach new markets and clients — clear expectations need to be established in order to create new products and services that align perfectly with each tech company’s values and guidelines from the beginning.
Bank-to-Bank partnerships are becoming more common, especially with small and mid-sized banks looking to stay competitive.
FinTech integration services from vendors offer complete packages of services to financial institutions, which go beyond FinTech advisory or consulting services.
OUTLOOK on FINTECH PARTNERSHIPS with banks
Overall, disruption and competition between financial institutions and FinTech companies is no longer a significant industry theme. Collaboration in any form is clearly beneficial for both sides in sustaining long-term market share growth, customer experience, and client retention.
In response to this going trend of Fintech partnerships with banks, fintechs are slowly moving away from B2C products to B2B offerings that connect with established banks, who continue to control the customer relationship.
Banks and FinTech companies partnering up yields the best from both worlds — boosting the industry with new innovative services from a trusted institutional partner. Each side directly benefits in carving a new niche AND gaining a wider reach of clientele — delivering advantages of cutting costs, increasing revenue, and enhancing customer satisfaction.
Financial services innovation will be even more widely available due to the partnership revolution in FinTech, with huge influences to come from innovation in big data, artificial intelligence, mobile, cloud computing, and AdTech in the next 3 - 5 years. //
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