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FINTECH SNARK RESERVOIR OBSERVATIONS
Prediction: By the end of this decade, bank-fintech partnerships will be a thing of the past.
This prediction flies in the face of recent industry trends. Fintech partnerships have been an important focus for banks in recent years. Cornerstone Advisors 2023 What is happening in the banking sector One study found that 70% of banks said partnerships were important to their business strategies for 2023, up from almost two-thirds in 2022.
Bank-fintech partnerships have become inevitable in the eyes of some industry observers. According to a Knowledge@Wharton article titled Why partnerships are the future of Fintech:
“As the financial industry questions what the next generation of banks and payment systems will look like, it’s clear that partnerships are a critical part of successfully riding the wave of change.
What are banks trying to accomplish with fintech partnerships?
It’s not just about providing banking as a service (BaaS) to fintechs. In Cornerstone’s study, 40% of banks cited improving loan productivity as an important fintech partnership goal, 36% cited increasing deposit volume, and 31% cited increasing deposit volume. loans.
The results of fintech partnerships, however, have been far from excellent. Only one in three banks saw an increase of 5% or more in the volume of their partnership loans, and half as many saw a gain of at least 5% in their non-interest income.
Why bank-Fintech partnerships fail
There is no doubt that banks face technology-related challenges, such as integration with core, ancillary and digital banking systems, as well as lack of API experience, when implementing implementing fintech partnerships. There are, however, other contributing factors, such as:
- Insufficient staff. Among banks with less than $100 billion in assets, half have no staff dedicated to financial partnerships, and those that do have only 2.5 FTEs. How many partnerships can a bank identify, validate, negotiate, deploy and scale with just 2.5 people?
- Ineffective organizational structure. Of banks with dedicated fintech partnership roles, a third only have a centralized team and another third only have partnership staff spread across the bank. Banks need a hybrid model: a centralized team to manage IT integration and operational staff responsible for executing the partnership.
- Lack of partnership skills. Fintech partnerships are a new business for most banks. IT and industry professionals may be experts at what they do, but that doesn’t mean they have the skills and experience to lead fintech partnerships. And it’s not a job for purchasing.
These are not really partnerships
These shortcomings can be fixed, but another problem has become the proverbial elephant on the table: many bank-fintech partnerships are not really “partnerships”: they are customer-vendor relationships.
In a Forbes article titled Better together: the evolution of bank-Fintech partnershipsFrank Sorrentino, CEO of ConnectOne Bank, quotes Nathaniel Hartley, CEO of MANTL, on how the fintech incorporates “being a good partner” into its strategy:
“We take a consultative approach to our relationships with our customers to help them extract significant value from our technology. This is a critical differentiator for maintaining successful, long-term bank-fintech partnerships.
Note that Hartley referred to the “customer” relationships. Hartley’s approach not only describes a good partnership, it describes what any good supplier Or service supplier must do. It’s about being “customer-centric.”
The term “partnership” implies, even means, a sharing of risks and rewards. However, this is not the nature of most bank-fintech relationships: banks purchase Or procure fintech technology and services.
It’s more than a question of terminology. Banks already face the daunting task of managing numerous technology and service providers. Calling a supplier a “partner” does not minimize or alleviate the challenge of supplier management.
The coming decline of bank-Fintech partnerships
It’s also more than a terminology issue because of the future of fintech. Despite the anxiety many in the fintech sector feel (it’s not an industry), fintechs have a bright future ahead of them.
To simplify things, there are two types of fintechs: 1) those that compete with financial institutions and 2) those that support financial institutions.
What is the future of the first group? They will:
- Successfully compete with banks and become established players in the banking sector;
- Fail and go bankrupt; Or
- Fail and pivot their strategy to offer their products/services through banks (see HM Bradley for a good example).
What is the future of the second group? They will: 1) fail and go bankrupt, or 2) succeed and become established players in the banking technology space.
My bet: By 2030, many of those in the first group who pivot and offer their products/services through banks (#3) will be bought out by banks, and those in the second group who succeed (#2) will be bought out. acquired by established banking technology companies like FIS, Fiserv, Jack Henry, Q2, Alkami, NCR Voyix, etc.
This is not a wild prediction: this is exactly what has happened in banking technology over the past 20 years.
What banks should do
The decline in the stated importance of partnerships – and the attention paid to them – does not mean that the use and involvement of banks in fintech will diminish. A smarter bank:
1) Refocus “innovation” efforts on tangible process improvement and revenue creation. The days of the “fintech petting zoo,” where bankers would go before their boards and point to their fintech “partnerships” with proof that they are “innovating,” are over. Banks need to find and select vendors that help them operationalize process change and new product/service creation.
2) Increase their investments in fintechs and their use. In many ways, banks have become the new venture capitalists in fintech. According to Cornerstone Advisors, there are approximately 500 community financial institutions investing in fintech startups, with average funding of $4 million per institution. However, many are not doing enough to implement these fintechs’ solutions.
3) Modify supplier selection criteria. Supplier innovation capacity must become a more important element of supplier selection criteria. Filling feature and functionality gaps is much easier than helping banks innovate processes and products.
4) Make data-driven supplier decisions. How will banks know whether technology providers actually meet innovation capacity requirements? Consultants will certainly continue to play a role. But banks need a more data-driven view. I’m keeping an eye on providers like True Digital Network and Naya One (with its “sandbox as a service” concept) that promise to enable this.
Final word: the BaaS slump
Just to clarify: the impending decline of bank-fintech partnerships does not mean the end of banking as a service.
Just as the so-called “partnerships” described above are actually customer-provider relationships, the same is true in BaaS, except the roles are reversed: Fintechs are the customers and banks are the sellers or service providers.
And don’t think for a second that the Apple-Goldman Sachs blowup casts the BaaS space in a negative light.