2023: The Year of Fintech Partnerships

With interest rates continuing to rise and VC funding down, many prognosticators are predicting an M&A boom in 2023. While we’ll no doubt see some consolidation, I think 2023 will amplify a different trend: partnerships.

Partnerships can offer companies a way to accomplish things together that they lack the resources to do alone. The opportunity falls along two key dimensions: improving products and expanding distribution.

Improving Products: Given the accelerating pace of innovation and the trend towards specialization, only the largest scale firms can be everything to everyone. Partnerships offer smaller firms a means of improving products by accessing the specialization of others. This can take the form of platforms to enable new features, data to personalize those features to specific customer segments or tools to enable new processes.

Expanding Distribution: While it’s always been easier to up-sell a customer than to acquire a new one, this is increasingly true as incumbents gather unprecedented amounts of data about their customers. Partnerships between complementary products offer opportunities to jointly leverage customer data, channels and other GTM investments and improve the unit economics of both parties.

In aggregate, partnership offer firms novel ways to accelerate growth and innovation while reducing capital intensity, time to market, operating cost and ultimately risk. Market conditions for the year ahead will make partnerships a particularly attractive option:

• No one wants to sell at a discount: In an environment where fintechs are struggling to raise capital, partnerships can offer pathways to advance product development and grow distribution without needing to sell or submit to a down-round.
• Platforms have matured: Aaron Frank captured this perfectly in a recent interview: “Now everything’s an API…we’re approaching a new wave of Fintech where you can spin something up in three months – with the Lithics, Highnotes and Units of the world – and have a product be moving money around the world without any direct bank partnership.”
• Embedded Finance: Companies in every industry are discovering that they can grow their TAM by embedding finance into their experiences – and the threats to their core business if they don’t.
• Partnerships 2.0: Partnerships have been playing a growing role in fintech for several years. However, what were originally simple partnerships are maturing and being expanded. With relationships and contracts already in place the pace of co-creating new features and distribution channels will accelerate.
• Customers want to do more with less: Whether for B2B or B2C, managing providers is a tax on any service. In a challenging economic environment, customers often consolidate providers in a drive to simplify operations. Partnerships that bundle products can offer customers the streamlined experience they’re seeking.
• Open Banking: The CFPB announced in October 2022 that it will be drafting rules to expand consumers’ access to their financial data. This will drive financial firms to accelerate their API strategies and seek out new profit pools; both will be catalysts for partnership activity.

These catalysts clearly point to an increase in partnership activity in 2023. Because well designed partnerships accelerate innovation and improve unit economics, firms that excel at partnerships are likely to grow faster and gain market share. Moreover, because partnerships beget other partnerships, these firms are creating a flywheel that will be increasingly difficult to counter.

In this newsletter I plan to reflect on fintech partnerships developments: who the players are, what they're doing together and how impactful it's likely to be. Please drop me a line with suggestions of what I should cover.