Fintechs have disrupted and are transforming the entire financial services ecosystem and banks can no longer afford to view them as a threat. Today, there is ample opportunity for banks and credit unions to work with fintechs to best serve their customers and members. Partnerships, however, can fizzle out and so it’s important for institutions to take a strategic approach that ensures these collaborations pay dividends over the long term.
“If you can’t beat them, join them.” While seemingly trite, this statement sums up the state of relationships between banks and fintech companies. For established banks and credit unions, trying to “outbuild” fintechs on technology is futile and unnecessary. Instead, partnerships are the way forward for the industry.
The notion that fintechs are the enemy, out to steal customers and market share is increasingly outdated. While competition exists, this thinking is short sighted for a couple of reasons. First, it assumes that the competitive advantages of banks and fintechs are identical. Secondly, it puts selling products before customer experience, which is never a recipe for success.
Having worked at one of the largest banks in the US, I can say from experience that the build versus buy (or in this case, partner) mentality will put banks further behind. Things are shifting and there’s increased appetite amongst traditional banks to partner with fintech companies. Today, the question isn’t so much about the viability of these partnerships; it’s more about the strategies and mindset needed to make them successful for both parties.
I have seen many partnerships between banks and fintechs succeed, and others not pan out. There are many reasons for this. As with all partnerships, those between banks and fintechs must be approached strategically and with the right objectives.
Here are four ways banks to maximize value from allying with fintechs examined through the lens of People, Process, Technology and Partnership.
People: partner and invest with intent and commitment
One of the biggest missteps that banks can make when partnering with fintechs is to invest in a company or create an accelerator programme but then turn around and not actually leverage the technology. This is often because there isn’t total buy-in or commitment from the stakeholders involved. For banks to get the full value out of these partnerships, senior leadership must commit to not just learning, but also to adopting the technology.
I have seen firsthand what happens when a bank invests in a fintech company only to lose the innovation to another bank due to lack of a long-term commitment. Today, another traditional bank or credit union armed with several key fintech partnerships is much more of a competitive threat than the fintech companies themselves.
This isn’t to say that every partnership will be exclusive. Part of the value proposition that banks bring to fintechs is that once a fintech establishes a tangible use case with a bank, it can then go sell to other banks. However, it doesn’t make sense for banks to push for a first mover advantage whether in tech or channel
revenue and not capitalize on it. To succeed, fintech partnerships can’t be viewed as pet projects of the IT department.
Those leading the partnerships from the bank’s side need to get buy-in from the start by the line of business users, as well as leadership across the entire organization. Then, based on viability, have a plan to implement and integrate new technology, as well as a plan for people to offer/sell the service if the use case is consumer facing. One strategy is to adopt a white-label relationship with fintechs where the bank brands the technology under its own name as a go to market strategy and to establish proof of concept with its existing loyal customers.
Process: lean into your own competitive advantages
Fintechs bring a lot to the partnership table in terms of tech capabilities and innovation, but traditional banks and credit unions also have a lot to offer based on years of process experience that should not be forgotten about or abandoned. In the same way that fintechs can help banks grow and open up new revenue streams, banks can do the same for fintechs.
I believe that in another 5-10 years, physical branches will be virtually obsolete. The competitive nature of bricks and mortar bank locations is vanishing quickly. However, traditional banks have large networks of existing customers, brand recognition and trust, deep expertise on marketing and launching new products, and an intricate knowledge of industry regulations.
Let’s take regulations. The experience and ability to navigate a complex regulatory environment is a key competitive differentiator that established banks have when partnering with fintechs. Traditionally, fintechs operated with the mindset of existing outside of regulatory requirements that applied to legacy financial services companies. Yet, with increased risk and regulatory oversight for fintechs, banks can provide the needed resources to help fintechs scale their offerings in a compliant way.
One step that a bank or credit union can take when partnering with a fintech is to broaden out the existing compliance department and establish a Center of Excellence for compliance and data governance that involves cross functional teams. The goal of this kind of CoE is to go deeper than the tech integration or channel referrals and get people trained and knowledgeable about how a fintech’s solution fits into the regulatory landscape, as well as a roadmap for ongoing processes and technology needs.
Technology: prioritize core IT modernization
Even if a bank or credit union has a plan to integrate and implement a viable product or technology from a fintech partner, it could all be moot if its core IT is too outdated to handle it. This sounds crazy, but I have seen this scenario. Tech can be a barrier to adopting more tech. Banks that have not yet adopted service-oriented architecture or APIs will not be able to leverage many fintech partnerships.
Interestingly, according to the Financial Brand’s 2020 Digital Banking Report, transforming legacy core systems ranked at the bottom of importance for digital transformation strategies by respondents. As the Financial Brand article cites, “digital transformation is not mere modernization,” but I would argue that digital transformation is not possible without modernization.
Many traditional banks and credit unions are 5-10 years behind in technology adoption. Additionally, the average mid-sized bank or credit union doesn’t have resources to fund an innovation group or large IT teams. Modernizing core systems may require additional outside partnerships with companies that have
both deep industry domain expertise and technology. Often, modernization does not require a rip and replace but banks still should have a plan to not get caught off guard when it comes time to implement a fintech solution that simply doesn’t work with existing infrastructure.
That doesn’t mean banks should modernize for the sake of modernization. Instead they should prioritize modernizing capabilities that most closely affect the customer experience across all channels.
Partnership: it’s all about your customers
The most important thing to remember when considering a fintech partnership is that the true end value must lie with the customer. If your partnership isn’t designed to provide customers with a better experience either through a consumer facing application or improved back-end efficiency, then you are probably wasting your time. I expect to see an ever-increasing number of banks and credit unions partnering with fintech companies as consumer behaviors continue to shift and financial brands find new ways to reinvent themselves.
Banks that consider these best practices across people, process and technology with an eye on customers will be best positioned to both survive and thrive in the coming years. It’s true that traditional banks can’t beat fintechs on innovation, but they can join them for long-term mutual success.
Bipin Sahni is chief strategy officer at Persistent Systems. This views in this article are his own.