Building a Partnership Stack in Financial Services
As the FinTech industry grows and matures, so does the list of available services and features from vendors and partners. These 3rd parties provide technical solutions (for front-end, back-end integration), data security, compliance, fraud monitoring, payment options, underwriting, etc. The pace of industry innovation applies pressure on financial institutions and startups to provide the latest to avoid a stale offering.
Building in-house capabilities takes time, which isn’t an option for platforms prioritizing speed to market. There are also added upfront costs for infrastructure, maintenance, and staffing for companies who become builders. It makes sense for companies needing to act now to leverage a faster, specialized 3rd party.
THE CASE FOR PARTNERSHIPS in fintech and banking
The partnership structure is a widely accepted business model in banking services — for certain programs (such as Banking-as-a-Service), it’s a regulatory requirement due to licensing (provided by sponsor banks). BaaS providers build a core infrastructure on top of sbank; compliance and program management may also be included (or outsourced to a vendor). Ultimately, these types of models allow platforms to launch new banking programs faster AND scale according to growth.
For platforms launching a program, a business decision must be made early regarding which components they’d like to own or keep. Other components can come from partners in the short-term, then transitioned to a different vendor, or built in-house.
Adding 3rd parties means losing some control at the start and making sure there’s due diligence supporting the strength and longevity of vendors. Ease of integration, system downtime, and platform support are key areas of operational risk for platforms to review in comparing partner choices.
Despite the extended time horizon and upfront cost, in-house capabilities can be a key advantage when it comes to long-term costs and revenue opportunities (no need to share or negotiate fees on an annual basis with bank partners or vendors). This is a stronger consideration for established startups and enterprises who have the resources (capital and staffing) AND customer volume for a “builder strategy”.
Certain tasks and activities are limited in scope and may be best for a specialized vendor to take on. Some of the popular, outsourced components include:
User interface
Compliance (KYC, user onboarding)
Payments (add-on)
End-user support
Account aggregation
Fraud prevention
Credit scoring (underwriting)
Are fintech partnerships here to stay?
Even though fintech startups were initially seen as disruptors back in 2010, the industry as a whole has matured and accepted these companies as collaborators.
The same partners that power today’s neobanks and challenger banks can also power traditional banks and credit unions. In fact, financial institutions leverage fintech startups at a higher rate when it comes to digital transformation of their legacy banking systems, digital channels, and user experience.
Banks may acquire specific fintechs based on innovative services and agility. The strongest partnerships come from companies that have remained an industry leader and stayed at the forefront of solving user painpoints.
When combined with heightened consumer expectations & demand, fintech partnerships are definitely here to stay in the long-term. The key consideration for platforms should now target differentiation in their overall product offering, as competing platforms could be using the same partners for the same service.
How will my program/app/product stand out from the crowd? Relying on partners for differentiation is a poor strategy in obtaining sustained growth. Key partnerships can help platforms get started and operate smoothly, but don’t provide unique, competitive advantages. Critical value drivers come from solving important challenges, and exceeding/anticipating the needs of a targeted group of users — not merely meeting them. Addressing market competition + sustained competitive advantage(s) leads to robust growth. Partners can help with the former but not the latter.
What’s next for the Partnership ECOSYSTEM?
Vendor and partner relationships will become standardized in financial services. Top single-service vendors will expand their functionality to acquire more of the “partnership pie”, especially in targeting small business end-users (such as freelancers, contractors, and those in the gig economy).
Incumbents will continue to evaluate the “build vs. buy vs. partner” decision — going all-in with companies that align with their strategic vision, culture, and increased value for clients. In the SMB sector, various accounting, invoicing, tax withholding firms are already being acquired by public companies (such as Bill.com).
The best-in-class partners with high traction and a strong customer base will also have the opportunity to incubate new startups. This is a key competitive advantage in a saturated partnerships ecosystem for both fintechs and banks to remain ahead of the pack in terms of product offerings and business models.
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