Fintechs and banks: Creating the next generation of banking, together (Part two of a two-part series)
Forging a successful bank-fintech partnership begins with finding the right partner. While there is no one-size-fits-all approach to a successful partnership, existing partnerships and engagement models can shed light on the correct approach.
There is no tried and true approach when it comes to how fintechs and banks can engage with one another. Existing engagement models differ among the banks and fintechs based on who is driving it. In our view, the most suitable model is the one that underlines complementing product lines, pivots on gradual investment, and adopts a risk-balanced approach to partnership.
The type of engagement can vary based on multiple factors. From a bank’s standpoint they include the current state of fintech interfacing, technology maturity, level of productization and direction of investing tech dollars; for fintechs, key factors include strength and novelty of the core product, size of user base, extendibility of the offering, and uniqueness of the skill set that they bring to the table.
Some of the recent partnerships in North America make it clear that banks can quickly go to market with new capabilities and technologies that they lack, with moderate investments, while fintechs efficiently acquire the right to operate in all 50 states.
For example, Chase partnered with OnDeck’s software as a service (SaaS) technology to provide online lending products to their small business customers, cutting down on cost and providing lending decisions in seconds and delivering funds within 24 hours.
While investment-based partnerships, consortium models and select product models are gaining rapid popularity, we see the acquisition model being the least favorite among banks. Only 20% of the top 50 U.S. banks have acquired fintechs. In fact, only 18 fintechs were acquired in the last five years with eight of these acquisitions occurring in 2017.
When it comes to strategic partnerships, both banks and fintechs have pursued them differently. Banks, such as Citigroup, have tackled the fintech disruption from all angles, using various engagement models.
In its early days Citi put together an elite team to run a start-up-like operation known as Citi FinTech. This helped Citi launch the new iteration of its mobile banking app in 10 months, something that used to take years to develop.
Today, multiple investment arms of the bank target fintechs including Citi Ventures. Based out of Silicon Valley, it has several investments in companies like Square, Betterment, and BlueVine.
Fintechs, meanwhile, are looking to go mainstream and engage with the banks to gain trust and credibility and to expand their products and market reach. Kabbage has significantly increased the number of customers and geographical presence of its instant lending platform through several partnerships with large financial institutions, including Scotiabank, to provide small business loans in Canada and Mexico; with ING for small business loans in Italy and France, and with Santander to provide loans for small to medium enterprises in the UK.
Architecting a bank-fintech collaboration
To successfully engage fintechs, banks need to envision the end-to-end journey starting with the identification of gaps in their capabilities that fintechs can complement and vice versa (see Figure 1). Before approaching the other party for partnerships, they need to re-think their operating principles to address potential cultural issues and develop a collaborative, non-bureaucratic structure that pivots on technology and customer experience at its core. Nurturing the new talent and reskilling the existing workforce to be more “techno-functional” are essential components for success.
Source: Cognizant analysis
Seven formidable factors
Identify capabilities to partner that leverage each other’s strengths.
Be it products, markets, tools, or subject expertise, banks and fintechs must perform a thorough inward-facing capability study/strength analysis followed by identifying potential synergy opportunities, before embarking on a partnership.
Keep focus on long-term value creation, break it down into short-term strategic priorities.
While bank-fintech partnerships are targeted toward long-term value creation, it is important to set short-term priorities (aligned with revenue cycles and fiscal year objectives), and success metrics such as the ability to more quickly convert ideas to marketable products and services to achieve quarterly growth in net new digital customers.
Identify the right engagement model.
Six factors influence the engagement model that banks and fintechs choose: spread of capabilities, investment levels, technology vision, workforce and cultural alignment, stage of maturity (primarily for fintechs), and size of overlap in customer base.
Develop a compelling business case.
Demonstration of small wins is the most compellingbusiness case that banks and fintechs can leverage to justify effective partnerships that improve their offerings, add customers and build a workforce of the future.
Manage change to build an agile operating environment.
Success of a partnership will largely depend on how rapidly the bank and the fintech manage change on four fronts: organization and skills, product mindset, customer-centricity, and speed of doing things.
Ensure strict data protection and privacy.
Banks need to establish a clear and definitive approach to transaction risk and third-party risk management, while fintechs need to up their game in protecting information such as personally identifiable information (PII).
Avoid circumventing regulations for speed or market making.
Banks and fintechs need to answer regulatory and compliance issue head on, much before they become prohibitive to business. Every business decision needs to follow a stringent regulatory screening process.
As banks build out digital capabilities and a product mindset, speed of such efforts is more important than the capabilities themselves. With rapid changes in technology and the nature of customer demands, agility and rapid change adoption should be at the core of every bank’s strategy. The best way to achieve this is via smart aggregation rather than developing everything in-house. What is clear is that fintechs are building the next generation of financial services and are continuing to challenge banks’ business lines, one after another, every passing year.
According to Statista's “2017 FinTech Report,” fintech firms processed $3.5 trillion in global transaction value in 2017 and is expected to reach about $8 trillion by 2022 — a more than 200% jump in just five years. This, interestingly, can be seen as a huge opportunity for banks to aggregate with fintechs and grow their digital customer base by several multiples.
Similarly, for fintechs, it is important to keep the growth momentum and a smart way to do that is to partner with established banks and financial institutions that have succeeded in a stringent regulatory environment. The partnership starts with identifying the right set of capabilities to complement, then selecting the best-fit engagement model, and eventually maturing along a value continuum by investing the right resources, dollars, and network.
That said, both sides need to act before they realize massive value erosion, and the time could not be more opportune than now.
Amit Anand, Assistant VP; Madhu Ponnuveetil, Senior Director; Siddhant Dash, Senior Manager; and Elias El-Wadi, Manager, at Cognizant’s Banking & Financial Services Consulting Practice contributed to this article.