Fintechs keep transforming the financial services ecosystem.
Banks and credit unions can no longer afford to view them as a threat. But
partnerships can flop, so it's important for institutions to take steps to
ensure these collaborations pay over the long term.
“If you can’t beat them, join them.” Seemingly trite, this
statement effectively sums up the pragmatic state of relationships between
traditional financial institutions and fintech companies. For established banks
and credit unions, trying to “outbuild” fintechs on technology is futile
pursuit — and unnecessary. Instead, partnerships have become the best way
forward.
While competition exists, this thinking is short sighted for
a couple of reasons. First, it assumes that the competitive advantages of banks
and fintechs are identical. Second, it puts selling products ahead of customer
experience, which is never a recipe for success.
Having worked at one of the largest U.S. banks, I can say
from experience that maintaining a “build versus buy” (or in this case,
partner) mentality will put a traditional institution further behind.
Circumstances continue to shift and there’s increased appetite amongst
traditional players to partner with fintech companies. Today, the question
isn’t so much about need for such partnerships. It’s more about the strategies
and mindset needed to make them successful for both parties.
I have seen many bank-fintech partnerships succeed, and
others not pan out. There are many reasons for this. As with all partnerships,
these must be approached strategically and with the right objectives.
Here are three ways traditional institutions can ally
effectively with fintechs, examined through the lenses of people, process and
technology.
People: Partner and Invest with Intent and Commitment
One of the biggest missteps financial institutions can make
when partnering with fintechs is to invest in a company or create an
accelerator program but then turn around and not actually leverage the
technology.
This seems illogical. But it often happens because there
isn’t total buy-in or commitment from the stakeholders involved. For
institutions to gain the full value out of these partnerships, senior
leadership must commit not just to learning, but also to adopting the
technology.
I’ve seen firsthand what happens when an institution invests
in a fintech company only to lose the benefits of the innovation to another
institution, frequently due to lack of a long-term commitment.
This isn’t to say that every partnership will be exclusive.
Part of the value proposition that financial institutions bring to fintechs is
that once a fintech establishes a tangible use case with a bank or credit
union, it can then go sell to other institutions.
However, it doesn’t make sense for banking institutions to
push for a first-mover advantage, whether in tech or channel revenue, and then
not capitalize on it. To succeed, fintech partnerships can’t be viewed as pet
projects of IT departments.
Those leading the partnerships from the banking side need to
get buy-in from the start by the line of business users, as well as leadership
across the entire organization. Then, based on viability, they must have a plan
to implement and integrate new technology. But beyond that, if the service is
something that is customer facing, the institution must have trained people in place
to offer and sell the service.
One strategy is to adopt a white-label relationship with
fintechs where the bank brands the technology under its own name as a
go-to-market strategy and to establish proof of concept with its existing loyal
customers.
Process: Lean into Your Own Competitive Advantages
Fintechs bring much to the partnership table in terms of
tech capabilities and innovation. But traditional banks and credit unions also
have a lot to offer, based on years of process experience, that should not be
forgotten or abandoned. In the same way that fintechs can help banking
institutions grow and open new revenue streams, banks and credit unions can do
the same for fintechs.
I believe that in another five to ten years, physical
branches will be virtually obsolete. The competitive nature of brick and mortar
bank locations is vanishing quickly.
Let’s look more closely at regulations. The ability to
navigate a complex regulatory environment is a key competitive differentiator
that established institutions have when partnering with fintechs.
Traditionally, fintechs operated with the mindset of existing outside of
regulatory requirements. Yet, with increased risk and regulatory oversight for
fintechs, institutions can provide the needed resources to help fintechs scale
their offerings in a compliant way.
One step that a bank or credit union can take when
partnering with a fintech is to broaden the existing compliance department to
establish a Center of Excellence for compliance and data governance that
involves cross functional teams.
The goal of this kind of structure is to go deeper than tech
integration or channel referrals and get people trained and knowledgeable about
how a fintech’s solution fits into the regulatory landscape. This also enables
the institution to create a roadmap for ongoing processes and technology needs.
Technology: Prioritize Core IT Modernization
Even if a bank or credit union has a plan to integrate and
implement a viable product or technology from a fintech partner, it could all
be moot if its core IT is too outdated to handle it. I have seen this happen.
Interestingly, according to Digital Banking Report,
transforming legacy core systems ranked at the bottom of importance for digital
transformation strategies by respondents. As a summary by The Financial Brand
states, “digital transformation is not mere modernization.” But I would argue
that digital transformation is not possible without modernization.
Many traditional banks and credit unions are five to ten
years behind in technology adoption. Additionally, the average mid-sized bank
or credit union doesn’t have resources to fund an innovation group or large IT
teams.
Modernizing core systems may require additional outside partnerships
with companies that have both deep industry domain expertise and technology.
Often, modernization does not require a “rip and replace,” but institutions
should still have a plan to not get caught off guard when it comes time to
implement a fintech solution that simply doesn’t work with existing
infrastructure.
That doesn’t mean banks should modernize for the sake of
modernization. Instead, they should prioritize modernizing those capabilities
that most closely affect the customer experience across all channels.
Remember the Ultimate Point about Partnerships
The most important point to remember when considering a
fintech partnership is that the true end value must lie with the consumer.
I expect to see an ever-increasing number of banks and
credit unions partnering with fintech companies as consumer behaviors continue
to shift and financial brands find new ways to reinvent themselves. It’s true
that traditional banks can’t beat fintechs on innovation, but they can join
them for long-term mutual success.
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