Fintechs, don’t go to market alone: three must-haves for your FI partnership
The last few years have seen an uptick in fintech and bank partnerships, as the former look to the latter to help ramp up their go-to-market strategy.
Fintechs seek to leverage financial institutions’ regulatory advantages, liquidity, capital and technology to scale and grow. Yet, for all the pairings, why do so many FI and fintech partnerships crash and burn?
The incredible growth potential inherent in these partnerships can cause both parties to find themselves moving a little too fast towards the finish line, overlooking red flags along the way. And while venturing out independently may seem like a tempting alternative for fintechs, it’s an even riskier proposition to go to market without enlisting in the support of a financial institution.
So what should fintechs look for in a financial institution to improve the odds of a successful partnership? Here are three factors to consider.
1. The right tech stack
There are more than 10,000 regulated financial institutions in the US alone. But we estimate that there are only about 100 banks with the infrastructure key to support fintech partnerships — namely, real-time, open-API, cloud-based systems that integrate partners’ technology to build strategic solutions within their own channels. Such features provide the foundation for a formidable, adaptable tech stack — one that can scale with a fintech’s product roadmap and meet escalating consumer demand for high-speed transactions.
Still, too many firms rely on legacy technology that makes collaboration with partners more onerous and revolves around sluggish batch processing for transactions, much to the frustration of retail customers and business partners accustomed to a speedier way of doing business. Such antiquated systems also make it harder to integrate and offer new features — which could present a serious problem for fintechs eager to make their mark with new releases and breakneck speed to market.
2. A unified vision for progress
In fruitful bank-fintech partnerships, it’s important to establish a unified sense of direction and a solid path forward. That includes aligning in your assessment and management of risks, seeing eye-to-eye on strategic objectives and agreeing on a collaborative approach to challenges.
When discussing a partnership, fintechs must confirm that their prospective partners agree not only with their current business vision, but have the flexibility and capabilities to adapt to how that vision may evolve and scale. The cost of getting this wrong can be high. If a banking partner can’t support a fintech’s growth and the latter must start over with a new partner, that’s a lot of time and potential profit down the drain.
For example, let’s say a fintech company provides a stellar user experience through its deposit solution. A year later, that fintech is now focused on broadening its offerings to include a lending solution, only to discover their banking partner lacks the crucial infrastructure to make that a reality. The key to bridging this disconnect is transparency, commitment to progress from the get-go and assurance that the banking partner can support growth.
3. Regulatory know-how
Navigating the regulatory landscape can be an intimidating minefield for fintechs lacking the knowledge and experience. Because of the risks involved, fintechs that choose to forgo a partnership with a financial institution are often prone to making avoidable mistakes regarding compliance issues. Why assume that challenge alone when you can partner with an entity far better equipped to handle the scrutiny?
As a B2C engaging with customers on a daily basis, banks are required to be well-versed in what will and won’t fly within a regulatory framework. The right FI partners will, first and foremost, give fintechs an accurate evaluation of the regulatory landscape that must be navigated. If adjustments are required, banking partners can remove much of the guesswork for fintechs to help them successfully go to market. For instance, if a fintech is designing a loan product that would rely on novel sources of customer data to assess eligibility, the FI can help ensure that the way the data is used complies with fair lending regulations.
That doesn’t mean fintechs should rely exclusively on their banking partners to ensure regulatory compliance. Regulators will still hold fintechs responsible for meeting certain compliance standards. High-growth fintechs, especially, will find it beneficial to develop and take on more and more regulatory compliance responsibilities in-house. But FIs can help their fintech partners get on the right track from the start, collaborating on compliance strategies early on to minimise risk.
Inevitably, partnerships between fintechs and FIs come with expectations from both sides. Ensuring these expectations are met means taking the time to examine the strengths and weaknesses of prospective partners. For fintechs used to moving rapidly, easing slowly and carefully into an FI partnership may feel strange, but it still beats taking the fast track to nowhere.