Bank/Fintech Partnerships: The Fad Is Over

Forbes | Ron Shevlin | Oct 14, 2019

business and tech - Bank/Fintech Partnerships: The Fad Is OverPartnerships are Not the Future of Fintech

Bank/fintech partnerships are crucial to the future of banking” has become a widely accepted meme in the industry.

In a recent study from Finextra, 81% of bank executives surveyed said that collaborating with partners was the best strategy to achieve digital transformation. They’re going to be disappointed.

The vast majority of banks are not well suited to partnerships:

  • Larger institutions may have the resources to identify, vet, and enter into partnerships, but their size and organizational complexity makes operationalizing and scaling partnerships difficult.
  • Smaller institutions typically don’t have the resources or skills needed to identify, vet, and enter into any meaningful number of relationships. Operationalizing partnerships often requires integration into core apps which can be a challenge for smaller institutions.

Then there’s the issue of corporate culture which, in many banks, is not conducive to partnering with outside entities. The Competing Values Framework developed by Cameron and Quinn helps explain why–some cultures are more control-oriented than collaborative.

Partnerships Are No Piece of Cake from the Fintech Perspective

Brett King, founder of fintech Moven told me, “The biggest barrier to bank/fintech partnerships is banks’ procurement departments. They treat us like small IBMs and hammer us with performance and risk clauses that would kill us if we let them.”

See: 10 Key Issues For Fintech Startup Companies

Echoing that sentiment was Philippe Gelis, CEO of fintech Kantox, who wrote, “Inside banks, there is also no single decision maker. You need to convince multiple stakeholders that the partnership makes sense, that it will create significant extra value for both parties, and that the risk of cannibalization is low. Once that’s done, you then need to convince their compliance department, IT team and legal.”

What does this all add up to? According to Dr. Louise Beaumont from Publicis.Sapient:

“For banks, partnerships won’t generate the quantum leap they need to move beyond a decades-old, product-centric mentality to deliver next-generation financial services that consumers deserve. At best, they may gain a workable solution that squats awkwardly in the existing infrastructure and brand. At worst, banks will fail to deliver any noticeable difference to customers beyond a flurry of press releases.”

Industry Participants Will Be Connected, But Not in the Form of Partnerships

This isn’t to say that banking industry participants (e.g., institutions, fintechs, and vendors) won’t be highly interconnected–they will be. But one-to-one partnerships won’t be the predominant form of connection. The most prevalent ways to connect will be:

Platforms. Amazon is a platform. There are over five million marketplace sellers across all Amazon marketplaces (more than one million new to Amazon in 2019 alone). They’re hardly “partners” with Amazon. According to a Forbes article titled Digital Platforms Are Eating Banking, there five types of digital platforms taking over the banking world: 1) Megabank API toolkits; 2) Marketplace platforms; 3) Analytics platforms; 4) Business banking platforms; and 5) Core integration platforms. Platforms provide a plug-and-play capability that enables participants to interact, transact, and integrate without partnership or one-to-one contractual arrangements.

See:

 

Open banking. Consulting firm EY defined open banking as: "Online banking and financial services enabled through consumers' ability to offer third-party providers access to their personal bank account data and payment initiation." This type of connection enables the sharing of data between parties without a contractual agreement (i.e., partnership) or transactional capability (like a platform provides).

[Banking]-as-a-service. The term BaaS is often used interchangeably with open banking, but I’m using the term here to describe what fintechs like Harvest (wealth management-as-a-service) or StreetShares (lending-as-a-service) provide to banks. These arrangements are somewhere between a partnership and a traditional vendor relationship. The BaaS fintech provides a “service” to the financial institution–in these examples by offering a product or service to the market–but with non-traditional service level agreements and support requirements.

Alliances and consortia. Partnering with each other may be a better starting path to partnering with fintechs. Examples include Alloy Labs Alliance, a shared innovation lab and accelerator, and CU Ledger, a credit union service organization focused on distributed ledger technology.

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