Bank-fintech partnerships are easier than you think

A successful bank-fintech partnership: How developers can build a case for their fintech products

“We should be scared s**tless about that.” So said Jamie Dimon, JPMorgan Chase CEO, when asked about the rise of PayPal, Square, and other new titans in the fintech domain. Bank-fintech partnerships, however, have become increasingly common, as traditional financial institutions are shifting toward collaboration with tech companies instead of competing with them. In this article, we will explain how a fintech startup could make a better case for collaborating with banks, point out the most common obstacles for such partnerships, and present a few success stories.

Bank-fintech partnership framework

Ernst & Young (EY), one of the top 4 companies specializing in audit and financial services, published research on the cooperation between financial institutions and fintech companies. One of the main points of the piece is that the biggest threat to banks is not financial startups themselves —- it’s from other banks that are better at partnering with fintechs and getting more out of these partnerships.?

This shows that there are plenty of opportunities for collaboration. However, it is one thing to know about these opportunities; it’s another to actually partner up with a bank. EY suggested four steps that a fintech can take to improve their chances.

1. Demonstrate value?

To help ensure that a bank wants to collaborate with your company, you must display the benefit you bring to the table. At its core, this is about solving problems with the solution you offer, but it also includes the process of implementing change, and whether that change is incremental or disruptive.?

“Globally, there are more than 5,000 FinTech organizations — and those unable to articulate the problems and solutions have the potential to fail,” the report’s authors write.

2. Stand out by ensuring compliance?

Banks have always been big on procedures and regulations, not to mention the voluminous legal requirements to which they must adhere. This means a fintech startup that can demonstrably prove its ability to fulfill these same requirements has a better chance of securing a partnership and gaining benefits from it.?

In this case, standing out means not only ensuring compliance with the law and the bank’s internal procedures but also using the legal opportunities presented by the regulators. For example, UK fintech companies were the first to gain access to the regulatory sandbox — a government-supported environment where they can test their product with live users in a controlled environment, albeit with somewhat relaxed rules. US fintechs have the same option as well.

Fintech is a core part of the banking ecosystem. Source

3. Grow your network

Theoretically, any fintech company can approach a bank with a partnership offer. Major financial institutions tend to have their own innovation departments that handle such requests. The direct route is easier for those fintechs with some experience in the market and similar cases in their portfolio.

Knowing the right people facilitates this process, and not just those in the banking space — connections with investors, regulators, and consulting companies can also add weight to a fintech’s offer.?

4. Build a solid business case

Demonstrating that your solution can bring a worthy ROI within a reasonable period of time is an obvious requirement. What is not always so self-evident is setting the right expectations for optimal cooperation. The bank needs to be aware of the necessary resources, the scale of change necessary, and the level of risk involved. These aspects of the relationship should all be highlighted as soon as possible to avoid disappointment and frustration later.

Another important point is protecting your intellectual property. There have been cases when a bank’s internal IT department copied the ideas presented to them by a fintech company, so finding the balance between enticing the potential partner and keeping your secrets is worth it.?

Pain points of fintech collaboration with banks

Another EY report highlighted the most common problems that revolve around fintech collaboration with banks.?

“With Fintechs’ increasing impact on consumers and economies, it is time to truly decipher the appropriate way to include and engage the startups with financial institutions. To nurture the collaboration, it is key to understand the fragility but also the potential of the partnership,” wrote Hanne K?rh?g, a partner at EY.

Source

1. Cultural differences

Startups tend to adhere to the “fail early, fail often” philosophy to quickly iterate on product versions and find the most effective approach to the market. Banks, on the other hand, usually have a rigid and time-consuming process for making and approving decisions. These differences may result in misaligned expectations regarding the project execution time, potentially frustrating both sides.

Successfully adapting to these differences requires both parties to make a concentrated effort.?

“[The Fintech] is not like a legacy organization with 17 different organizational levels, so leverage the motivation of the Fintech to your advantage and know that they do not know everything,” the report quotes an executive from a Danish financial institution.?

Banks and fintechs need to adapt to each other and recognize both the need to work fast to gain the maximum benefit from the partnership and the importance of considering the legacy systems already in place.

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Wisercat recently delivered a neobank app for a Middle Eastern customer and got a chance to experience cross-cultural adaptation for ourselves. Contact me to learn more about this project.

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2. Governance

As mentioned above, the emphasis here is on ensuring compliance. For banks, adhering to regulations is at the core of their operations — it’s a must. Fintechs often place it second, as their products are still in development and might be out of the scope of some common laws. The same goes for documentation.?

To mitigate the differences, banks should allow fintechs some slack to let the prospective partners catch up on the necessary compliance issues. And the startups themselves should invest in having thorough documentation as a show of trustworthiness and reliability.?

3. Technical disparity

Banks often rely on old but stable systems to manage all aspects of their day-to-day operations. Conversely, the entire point of fintech startups is to be on the cutting edge of technology. Bringing legacy and new software together is no mean feat in itself. Moreover, it has to be done reliably; otherwise, the bank and its clients could suffer actual financial losses.??

However, technical expertise is one of the reasons traditional financial institutions start working with fintechs — meaning that with patience and care, the bank-fintech partnership can overcome this issue.?

4. Mutual buy-in

According to the EY report, buy-in problems often come from people either not having the will to make the partnership work or not having the decision-making mandate. When this occurs, the collaboration is bound to remain underpowered and neutered.?

To mitigate problems related to buy-in, both sides need to choose the right people for the right job, ones with both the power and motivation to make it happen. And after the process has begun, it is worthwhile to organize executive buy-in meetings to review feedback and decide how to best further the direction of the partnership.?

Annual global financing trend to VC-backed fintech companies. Source

Success stories

There are quite a few bank-fintech partnership examples out there. We picked up some of the more prominent ones.

Barclays/Flux

Barclays has been criticized for its large-scale financial support of fossil fuel extraction, going against the trend toward decreasing the environmental impact of corporations.?

As part of the plan to become more environmentally friendly, the bank strengthened its relationship with Flux — a paperless receipt startup it had a minority stake in. Now, when a person uses their Barclays debit card to buy something from certain participating merchants (e.g. H&M or Papa John’s), they can get a digital receipt to their mobile banking app instead of receiving a physical one. The paper used for physical receipts can’t be recycled or turned to compost, which means decreasing its use is good for nature.?

Bank of Montreal/Blend

The Bank of Montreal (BMO) wanted to expand its digital offering. They decided to improve the experience of getting a mortgage, which was rightfully considered complicated and tough. So they partnered up with Blend, a digital lending startup. The fintech company provided the bank with a white-label version of the Blend app, allowing users to either get everything done by themselves or have a bank rep join them online and help with the process.

The result was a stunning success, decreasing the time it took to get a mortgage by 5 days and bringing a 253% YoY growth in digital home equity applications.

"Customers are telling us that they are looking for digital-first experiences, and working with Blend gives us the opportunity to find innovative ways to bring digital solutions to customers across their banking journey," said Brett Pitts, the Chief Digital Officer at BMO Financial Group.

ING/Minna

ING, a global bank with a strong presence in Europe, partnered up with Minna, a subscription management startup. The collaboration first ran as a pilot project with the Belgium branch and has since expanded.

This partnership provides ING customers with a solution that allows them to subscribe (or unsubscribe) to different services with just a couple of clicks, saving considerable time for the user. This includes entertainment (e.g. streaming services) and utilities like gas or electricity. For the bank, the benefit lies with keeping the users on their online platform and improving their overall experience.?

Integration of Minna with ING’s online platform. Source

City National Bank/Extend

City National Bank was able to add a new convenient product to their line by partnering with Extend, a virtual credit card service.?

Now the bank’s corporate customers can quickly issue corporate credit cards to employees, partners, and contractors. These virtual cards can then be used to make contactless transfers through the Apple Pay and Google Pay mobile wallets.?

Besides the convenience, this also adds another layer of security: the card number and other details aren’t exposed anywhere during the payment process.?

Conclusion

Collaboration between banks and fintech companies has become a new norm. Legacy financial institutions and startups alike embrace the opportunities that these partnerships offer, whether it is improved user experience, saved costs, or diversified revenue streams. The differences between the partners can potentially cause some friction; however, as the above examples show, these difficulties are not insurmountable.?