How to leapfrog older competitors by partnering with xTechs

Large firms in established industries are increasingly collaborating with new companies that can deliver innovation and revenue growth. These smaller companies, often called xTechs – think fintechs in the financial industry – benefit from access to capital, income, cash flow and industry knowledge.

In the first of a series of briefings on growing with xTechs, researchers Alan Thorogood and Peter Reynolds of the MIT Center for Information Systems Research examine the risks and benefits of xTech partnerships.

The authors look specifically at financial services, where fintech partners have helped major banks implement features such as the ability to open an account within a day and approve mortgage applications faster than competitors.

Four types of xTech partnerships

According to the researchers, there are four common reasons why fintech startups and financial services collaborate.

1. Exploring technology. Here, large organizations look to fintech partners to test new customer-facing products or internal systems. For example, the fintech firm can work quickly to install a new digital platform to test support processes such as compliance, governance, security and integration.
2. Incubates business models. In the business model approach, partners build a model and customer value proposition and then offer a test product to customers. The owners of business operations curate the support processes. In these cases, financial services firms often identify a product that fills an unmet need for a small target market segment and then test its use and performance. Through careful iteration, they can build the confidence to implement it on a larger scale.
3. Scaling. This type of partnership involves moving large workloads – hundreds of products, millions of customer accounts or billions of transactions – from legacy platforms to new fintech platforms. This helps large firms break down silos between business units, increasing data monetization and data liquidity across the organization.
4. Passive investments. In these cases, a financial firm can invest directly in a startup through an incubator or investment branch. These arrangements work best when the large organization gives the fintech firm significant leeway to innovate.

Risks and benefits of xTech partnership

There is some risk to this type of partnership, the researchers found. Managers of multinational banks are often concerned with regulatory and compliance risks and brand risk, more so than many fintech firms. As a result, many large organizations choose to initially isolate fintech partners from core business systems to reduce risk – and to allow easier separation if necessary.

Startups, meanwhile, must demonstrate progress to investors. That means moving quickly, which often conflicts with large organizations’ iterative approach to implementation. They may also struggle to meet regulatory standards as well as the expectations of various institutional stakeholders.

However, such partnerships can also be rewarding. Fintech firms offer larger companies the flexibility to test new products with existing customers, or to develop new lines of business, without disrupting core business systems. Moreover, fintech products bring projects to scale far faster than large organizations can achieve with their less agile development approaches.

Building a future-ready organization through an xTech partnership is beneficial in itself, but it can also bring financial rewards. MIT CISR research indicates that large organizations achieve an average revenue growth of more than 17% compared to the industry average through improvements in customer experience and operational efficiency. In other words, finding the right xTech partner can help companies leapfrog competitors by quickly gaining a significant competitive advantage.

Read the research briefing Growing with xtechs