What is the secret sauce of a successful banking / fintech partnership? – Tear sheets

Fintechs entered the banking industry as a disruptive force – the established system did not work for everyone, providing great opportunities for a new generation of financial service providers to change banking forever through creative technologies.

Initially skeptical, traditional lenders would look on the sidelines. But the pressure to compete, banks and credit unions have increasingly chosen to bring some of that innovation into their own products and services.

One way to do this has been through fintech partnerships – in this way the banks do not have to build anything themselves, so it means speed to the market and flexibility, and it requires a smaller budget than a full acquisition route. For fintechs, they get to focus on only doing one thing well while gaining access to a broader customer base and industry expertise.

“Why compete by offering the same core products that have high set-up and maintenance costs, when you can specialize in adding extra value while reducing the cost of maintenance,” said Simas Simanauskas, Partnership Director at ConnectPay.

In recent years, partnerships have become increasingly popular – nearly 60% of banks and credit unions have entered into at least one fintech partnership in the last three years, according to Cornerstone Advisors. The average number of banking / fintech partnerships per year doubled to 2.5 in 2021 from 1.3 just two years earlier.

Source: Cornerstone Advisors

In many ways, this is the perfect duo. Banks sit on large amounts of data, and effectively act as a goldmine for fintechs who are hungry to run their algorithms to shape improved and tailored results. But compliance also plays a big role – fintechs who understand this aspect and are deeply committed to doing things by books are more likely to win banks.

After all, the potential to be unlocked here is to reimagine the size of the cake, instead of competing for the same small slices. Cooperation between banks and fintech can also produce positive externalities, such as offering financial services to previously underserved corners of the market and expanding access to capital.

There can be several types of bank-fintech partnerships. A bank may need help with operations, and may use third-party technology to improve efficiency. There may be projects around the customer-facing parts of the business, and here the bank could maintain the direct interaction with its customers or just focus on the banking products and services while leaving the customer relationship to fintech.

Source: IMF Global Financial Stability Report

Where do I start

It all starts with finding the right potential partners, either through formal processes or an organic approach driven by relationships. Many banks choose to create an innovation center to facilitate more partnerships.

In US Bank, David Ness heads the bank’s dedicated fintech engagement unit, which has developed an ecosystem of partners over the past six years with VCs, accelerators, private equity, investment banks. They have regular conversations with them to build these relationships, but it is almost impossible to stay on top of all the new technological solutions that are constantly emerging.

“It’s a balancing act between just finding companies and actually delivering value to our customers by implementing these solutions. So we constantly go back and forth, adjusting that model. It’s a big challenge to limit it and be disciplined when it comes to comes to what to focus on, when there are so many opportunities out there, Ness told Tearsheet.

US Bank has worked with the fintech sector in a number of new areas, including cryptocurrency, distributed ledger technology, asset tokenization, digitization of credit applications, fraud detection, currency conversion blockchain, personal financial insight and API integrations.

The goal is to commercialize these solutions, either directly in a consumer-facing app or into one of the bank’s production environments, by looking at how to incorporate the bank’s existing opportunities with fintech solutions, Ness said.

But to get there, banking / fintech partnerships require very close cooperation between the two.

Alignment of goals

The most important aspect of a successful partnership between banks and fintechs is that both parties understand each other’s goals, and they share a common commitment to achieving those goals, according to Ryan Harris, EVP and Head of Payment Partnerships at The Bancorp.

Bancorp does not go directly to the consumer – it is a bank whose business model includes disintermediation by activating fintech products and services. It is one of the largest banking partners in the area, and works with market-leading technology companies such as Chime, SoFi, Venmo, Oxygen, BlueVine, Uber, to run their financial services in the background.

“If expectations are not in line, things can go wrong very early, so it is important to have a clear understanding at the beginning of the relationship of each other’s abilities, risk appetite and what their roles will be throughout the relationship,” he said.

Depending on the product type and the risk profile of the customer, The Bancorp ensures that the partners have the financing, bandwidth and management expertise to be able to achieve their goals. In partnership, the bank looks for a demonstrated ability for scaling and human resources, as well as compliance and risk management infrastructure that truly conforms to the bank’s ideals. And of course, their product must be good enough to move the needle for the market.

“I’ve seen a lot of good ideas that can be very successful, but they did not have the right people behind them. In so many cases, you focus more on the strength of the fintech team than you focus on the product. You need strong entrepreneurs and people who has shown a history of being able to innovate, turn around and do things quickly if something does not work, Harris told Tearsheet.

Goal setting is also a top priority for fintechs, as they want to ensure they provide multiplicative value to their customers, according to Charles McKinney, co-founder and CEO of embedded mortgage fintech Vontive.

“We want to see a partner who has a core product or core service where bolting on the Vontive loan will be increasing for them – not just as a new revenue stream, but also in terms of the resale rate of their core product or service,” he said. .

If the two parties are not completely on the same page, it can lead to failed partnerships, especially if the bank’s incentives are not in line up and down in the organization, said Kathryn Petralia, co-founder of Kabbage and, more recently, Keep Financial. Prior to the American Express acquisition, Kabbage had a number of partnerships with billionaire banks such as Santander, ING and ScotiaBank.

“What we found was that partnerships were not successful because our interests were not in line. The CEO would be excited to work with a fintech, but those who had to do the job every day were less excited because they were not paid more to do. it worked, she noted.

Challenges

For a bank, working with a fintech can also involve some risk. This is the part where things can get difficult – fintechs like to move fast and break things, while banks change slowly and are very regulated, which leads to a tough balancing act.

In more traditional banks, the risk management divisions have an incredible amount to say in relation to new products. This is why it is important to find the right people in risk management functions who will protect the bank, but at the same time be innovative thinkers, according to Bancorps Harris.

“Allowing fintechs to move quickly and be on the verge of destroying something while staying within the bank’s risk appetite and keeping them compatible is the secret sauce. We have built our entire organization to allow these parties to innovate and surround them with people who can ensure that if they knock a glass of crystal glass off the table, we are there to catch it before it breaks, Harris said.

It is important to have an open mind, he noted – just because the bank has always done something in a certain way, it does not necessarily dictate the way it must be done in the future.

But to get many programs up and running, banks need to take some risk, especially in lending.

“If what you want to do is open up your risk opening, the people in that organization must be comfortable doing it. If they are not, the partnership will not go anywhere, because the bank just keeps doing what it has been doing every day. , added Kabbages Petralia.

Bringing in an external partner requires some adjustment for the banks, as they must ensure that they comply with the requirements and fulfill regulatory obligations throughout. But a bank can start small and work with a single treatment unit, Harris suggests.

“Invest in data centers to allow scalability, consider people who have done it before, who know how to manage data and build risk appetite – these things are going to fit well with fintech,” he advised.