While partnering with a Fintech isn’t a completely foreign concept to all financial institutions, the development of meaningful, mutually beneficial partnerships between the two is not exactly a common practice.
The banking sector has been disintermediated by agile, fast-moving fintechs that are in tune with their customers, offer innovative products at great price points, and reject unnecessary, time-consuming procedures that plague banks. It’s these cumbersome processes that prevent large financial institutions from truly innovating and taking exciting new products to market fast. Banks simply cannot do what fintechs are capable of doing, and when they try, they often fail due to cumbersome operational processes, risk frameworks and overly conservative thinking.
There have been instances where banks have tried to make startups operate under existing operational frameworks, but they are seldom (never!) successful; the lifeblood of a startup – innovation and agility – is crushed. On the other hand, if a startup wants a bank to operate like them, it’s not a feasible solution either. The media scrutiny that a bank risks for making a mistake can result in huge reputational damage, whereas mistakes are how startup’s learn, evolve and grow.
Banks don’t take risks and over manage startups. If a startup doesn’t take risks, they don’t survive.
The key here is to find the right balance through strategic, mutually beneficial partnerships that are built on trust. Banks need to trust in the ability of the startup that they choose to partner with, and startups need to be able to innovate fast, while being respectfully aware of the sensitivities and legal obligations that banks must adhere to.
The current banking dilemma
As mentioned above, the rise of fintechs has disrupted what was once viewed as a failsafe-banking landscape, leading to a fear of disintermediation, potentially resulting in banks becoming a utility service rather than customer-facing institutions. Other key aspects that at the core of current banking dilemma include:
– Legacy banking systems. Large banks run on outdated tech because it is deemed too risky and time-consuming to overhaul/replace existing systems. Also, when banks merge/acquire other financial institutions they “bolt on” the other infrastructure to their existing systems. This leads to archaic and complex systems architecture which hinders the speed and cost-effectiveness of ‘building’ financial innovation.
– Access to funding. Funding for new innovative projects within banks occurs periodically (yearly in most instances) and is competitively fought over between departments. Increasing costs of regulation and upkeep of existing systems often gets preference over new technology development. Partnering with a startup involves a set amount of investment that is purely dedicated to innovation.
– Banks don’t take risks. When risks do arise, they are over-managed due to perceived reputational damage that could ensue. This process kills any ability to truly innovate. Startups however, are not burdened by these processes and as a result can build fast and on budget.
– Startup energy is contagious. People join startups because they have passion, believe in the company and its vision, and have an insatiable drive to make the business succeed. Banks feed off this energy.
– Banks move slowly. While banks may be profitable and pay high salaries to secure great people, they also move exceptionally slowly. Startups hire for passion, drive and skill, and move fast.
Why startups should embrace banks
– Appetite for growth. Dependant on the nature of the partnership, Startups can gain rapid access to a Bank’s customer base, which helps them grow and scale.
– Reputational association. Banks are trusted entities with established brands and strong reputations. This association helps to build trust within the market of the startup’s capabilities.
– Startups need funding. It takes many years for a startup to become profitable. Without adequate investment, they cannot survive.
– Informal processes. Startups lack regimented formal processes, and due to the small size of their teams, they it’s not something they require in the early stages. As the company scales however, more formalised procedures must be put in place. This is where certain learnings from the banks can come in handy.
– Startups have ideas but need exposure. Startups are fantastic at coming up with disruptive ideas, but without adequate support and market exposure, they risk failure.
– Startups attract amazing people. Startups secure phenomenal people because they believe in the dream, culture and potential of the business – not to mention equity ownership! Banks however get great people by paying the best salaries.
– Startups need to take educated risks. If startups didn’t take risks, they wouldn’t survive. The financial backing of investors – such as banks – is key to the growth and sustainable future of startups.
Selling the concept of a fintech partnership internally is often a challenge. I’ve found success in banks forming specialist teams comprising personnel from each department (product, tech, commercial, legal, risk, distribution, marketing and finance). These teams are empowered to make decisions on startups without the need to push decisions into the standard centralised banking processes, and raising the probability of a positive outcome.
Disruption within the banking sector is rife, but rather than fighting against the grain, the best way forward for banks that want to future-proof themselves really is to form solid partnerships with fintechs. Executed correctly, fintech partnerships can help banks to innovative, move fast and compete on this new, disrupted playing field.