24 March 2017
Graham Seel

Banks and Fintech

Graham Seel - BankTech Consulting

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Innovation in Financial Services

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

Advice to Fintech Firms: How to Partner with Banks

29 March 2016  |  7026 views  |  4

Banks can meet changing customer expectations, but it won’t be easy. Partnering with the best Fintech firms will be a tremendous help. But what will characterize the best Fintechs?

This is the fourth in a series of articles exploring Fintech's role in transformation of banking. 

Can Banks Ever Meet Customer Expectations? looks at the customer satisfaction problems for banks. It examines the effect of demands of the “connected customer”.

What Do Customers Expect From Banks? digs deeper into ways in which “connected” customers expect banks to behave, expectations driven by Apple and Google rather than the banks.

Banks Spend Billions on Digital Initiatives. Why Aren’t They Winning? looks at several business and technology challenges banks face, which make it difficult for banks to meet customer expectations without help.

Banks need help, and they have recognized that some of that help will come from Fintech firms. That is why so many banks have created incubators and accelerators.

Banks and Fintech firms need each another. It took a while to sink in, but most players now agree. But Fintechs struggle with how to partner with banks, and vice versa. What will a good Fintech partner look like?

Partners, not Vendors

Without a doubt, banks are looking for partners. They want companies that will share their business goals and understand their vision. They want partners who will measure success the way they do.

But what partnering model are we talking about? There are several existing or emerging models.

  1. Standalone in-house solutions: Occasionally a need can be fully met by implementing a partner’s technology as a standalone platform. For larger banks, this will be rare. Entry into a new business, such as a niche insurance product, may present a possibility. Integration with corporate systems (general ledger, regulatory reporting, etc) would still be necessary. Nothing is truly standalone in banking.
  2. Integrated in-house solutions: For larger banks, solutions will be hosted in-house. For smaller banks this may be a SaaS solution. Either way, the greatest challenge is to collaborate on integration. Examples would be an ACH or wire solution, or a full core banking system.
  3. White label solutions: At times banks may outsource to a Fintech partner. The partner takes full responsibility for technology and operations. There is some regulatory risk for the partner. For example, responsibility for AML monitoring or sanctions screening. The customer will see the service as a bank offering (the effect of white-labelling). An example might be a small business lending solution funded by the bank, but operated by the Fintech.
  4. Full Outsourcing: Not all services are customer-facing. Internal services, or areas not a core competency for a bank, may be outsourced to a Fintech provider.  In this case, there is a clear contractual division between bank and partner. Regulatory monitoring and reporting may become examples of this model.
  5. Apps and Add-ins: Some banks have an app-oriented approach to customer experience. In this case, the opportunity for Fintech is clear. They may be iOS or Android apps or widgets. They should also be functionally paired with web components (promoting an Omnichannel orientation). They will need to be robust, well-designed and easily integrated. Such add-ins have the potential to greatly enrich customer online and mobile experience.
  6. APIs: This model can work in both directions. Banks will publish APIs for customer and transaction data access. This will allow Fintech firms to deliver capabilities that enhance customer experience. For European banks this will soon be mandatory (under PSD2/XS2A) and the UK looks set to follow. In reverse, banks may access data stores and SaaS transaction capabilities offered by Fintech firms. They will expect well-designed and documented APIs.

Fintech firms should be clear on the kind of partnership they are offering to banks. Banks, for their part will need to consider the implications of each partnering model. This includes such things as:

  • Regulatory monitoring and reporting responsibilities
  • Third-party risk management
  • Cyber-security implementation
  • Customer service and operations processes
  • Ownership of customer interactions

What Makes a Good Partner?

Most companies will call themselves partners rather than vendors. There may in fact be a case for being a vendor (there is less long-term reward, but also less overhead). Yet, if Fintech firms are to be a part of the transformation of banking, they will do so as partners.

So what are the factors that will make a Fintech a good partner? How would I advise Fintech firms to focus? What will make you a good strategic partner to your banking prospects?

Know Your Partner’s Business

There are several aspects to this. Only by mastering them all will banks view you as a partner, as a true peer as they develop and implement their business strategy.

  1. Know the banking industry, or at least the pieces of it in which you play. This goes further than you might think. For example, a consumer P2P payments Fintech provider needs to understand the business context. This includes payments clearing and settlement mechanisms; cross-border implications; real-time versus delayed payments; and alternative payment mechanisms. Without this broader view, you will not be an effective advisor focused on the bank’s and its customers’ needs. You will also not be able to recognize the true extent (and limitations) of your products.
  2. Know how banks make decisions: Understand key business drivers, program and project funding approaches. Learn banks' partner selection processes. Recognize the intangible, unspoken determinants of partnering decisions.
  3. Know your domain: Be sure you have something to offer that the bank doesn’t already have. It may be insights on recent changes in the domain. It may be a depth and/or breadth of understanding of how things work in the domain. The bank wants a partner who can complement them, not just a product addressing a particular problem.
  4. Know the bank Show that you have researched the bank. Be able to talk about strengths and weaknesses, market presence, strategy and its current challenges. Most of this is publicly available. Use contacts and early meetings to learn what is keeping senior executives at the bank awake at night. Learn the organization structure of the bank. Know who are the economic buyers and key decision-makers for your domain.
  5. Put yourself in their shoes: see the bank's problems in terms of financial, risk and reputational impacts to the bank. Speak the bank’s language, not your own. Empathize with banking executives, and help them to articulate their problems. Express your value proposition in terms that translate to a business case for the bank.

Keep the End in Mind

One of the trickiest aspects of partnering is reconciling what sometimes may be conflicting business objectives. The bank is accountable to shareholders, regulators, customers and (not always recognized) their communities. The Fintech is accountable to funders, partners and customers, and sometimes regulators. They also are accountable to their communities, however defined - I will be blogging shortly on this community aspect of partnership.

An important early step is to identify common values, vision and goals. Without these, there can be no partnership.

The shared values may be publicly stated or implicitly held. They may be moral/ethical, or business priorities. For example, a common commitment to open and full communication becomes a business imperative. This is then a basis for partnership.

A shared vision is a mutual understanding of what the world will look like after our partnership has delivered. A shared vision dovetails into the broader vision of each partner. Without it, the bank and the Fintech will have different definitions of success, completion and direction.

Shared goals must be jointly set. They should be measurable, and with agreed contribution from both parties. Bank and Fintech must agree on what completion means. They should share metric determinants of success.

Choose Your Partner

An important aspect of partnering is that selection is a two-way process. Not only is the bank selecting the Fintech, but the Fintech is selecting the bank. To be a partner, you need to be sure that you can work together. That has to do with establishing shared values, vision and goals. It also requires being able to work effectively together.

Not every bank is a good partner for a given Fintech. Sometimes it is necessary to say no. Sometimes, failing to win a bid is good news, rather than bad. For long run established success, it is necessary not to be too hungry in the short term. That can be hard when you have impatient venture capitalists breathing down your necks. But a clear partnership strategy should help to satisfy them. So define in advance what your ideal banking partner looks like.

Fill in the Gaps

It is all very well to say Fintech firms should be strong partners to their banking clients. Fintech firms are usually built on entrepreneurship and good technology. But they are less often built on true banking expertise and industry experience. Fintech firms need industry professionals. Or else they need partnerships with industry consultants, to help them fill in the gaps.

In the early stages of a Fintech, it may not be appropriate to hire a full-time industry expert. The approach of a fractional executive may make more sense. This is an individual who can step into an executive role on a part-time basis. (S)he will share your business goals and learn your business. (S)he will provide deep and broad knowledge of banking, your particular domain, and your target banking segment. In other words – a model partner!

Banks cannot survive the ever-growing demands of customers and shareholders without good Fintech partners. Most Fintech firms will successfully partner with banks only by engaging their own banking experts. 

Graham, a 30 year banking veteran, runs BankTech Consulting. He is an expert in commercial banking, and provides strategic insight and internal business cases to banks. He works as a fractional Customer Success Executive to Fintech firms, facilitating their partnership with banks.

 

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Comments: (6)

Debbie Williams
Debbie Williams - FinTech Market Strategy - Sherborn | 30 March, 2016, 16:00

All good insights and true to my experience but there is nothing new or different here. Banks have been looking for technology "partners" (not vendors) for years - maybe 10. The days of just dropping a piece of hardware or software off at the bank and walking away are long gone. Now, most vendors (and banks) have been really bad at making the partnerships work long term and the financial incentives haven't always been aligned correctly to make it work. There's definitely work to be done. Let's see if this next generation of vendors can get it right...

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Graham Seel
Graham Seel - BankTech Consulting - Concord | 30 March, 2016, 18:23

@Debbie, I couldn't agree more. There is absolutely nothing new in the value and importance of partnership. I think for many Fintechs, though, the focus has been more on the product than the partnership. This may not be new advice, but it seems to be needed nevertheless. This "next generation of vendors" would do well to learn from the "old guard" of experienced bankers and bank technologists who have learned the hard way. That really is the main point of the post.

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 30 March, 2016, 18:58

Having marketed tech to finserv for over two decades, I count myself as a member of the "old guard" or traditional fintechs. Traditional fintechs saw their roles as being suppliers / partners of banks - doing stuff like CBS that banks knew they couldn't / didn't do by themselves. On the other hand, modern fintech came into existence with the core mission of poaching banks' customers by offering technologies and customer experiences that it thought couldn't be offered by banks - aka disruption. While some pundits are still drunk on the disruption of Kool-Aid, the proliferation of fintech partnerships with banks signals that modern fintech has failed in its core mission. Partnering with banks to provide tech that banks can't / won't develop inhouse is what traditional fintech has been doing for decades and, that too, without burning VC money. Key is how long the VC funding tap will be open, still allowing some modern fintechs to continue to chant the disruption mantra.

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Graham Seel
Graham Seel - BankTech Consulting - Concord | 30 March, 2016, 19:04

@Ketharaman i agree that the disruption mantra is fading. There are niche areas, such as "alternative" lending, where standalone Fintechs can be successful for a time, though even there regulation is catching up with them and their cost structures are increasing. Banks learn relatively slowly,  because they must for risk reasons, but you are right that they are much more open to partnership with Fintech than they were a few years ago. I think an increasingly large share of Fintech firms now understand that their partnership with banks is critical - now it is just a matter of learning (from people like you and me perhaps) how to do it.

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 30 March, 2016, 19:46

@GrahamSeel:

BFSI has been the most lucrative vertical for the IT industry for at least 30 years. Like I said, I've personally been a part of traditional fintech for over 20 years and I know people who've been in it for a decade or two before me. This proves that banks have been receptive to partnering with fintechs for ages. If banks have been reluctant to partner with modern fintechs in the recent past, the reason is simple: Will you rush to partner with someone whose life mission is to kill you? It has absolutely nothing to do with slow learning or risk aversion. Now that modern fintech has toned down its "we'll kill banks" rhetoric, banks have added them to traditional fintech and are exploring partnerships with them, as they've been doing BAU for the past 30-40 years.

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João Bohner
João Bohner - Independent Consultant - Carapicuiba | 31 March, 2016, 12:31


If you 'old guards' allow me I would like to put the following  topic under discussion:

I think there is a great lack of understanding on what is the banking business and what are other businesses.
Each industry, commerce or services offer their 'products'.
And it has heavy marketing campaigns to get customers in each area, to buy its products.

Now, what is the Bank's core product?

Money?

But the money come from customers, right? (So Money is NOT the Bank's core Product).

In other industries, the customer purchases goods. In the banks, the commodity (money) belongs to the customer.

Now, what are the concerns of bank's customers?

In my simple view, they are three types of bank customers:

1. The customer who needs money at the moment.
It will contact the Bank and will contract the best service to fit its needs, a Loan, Leasing, Working Capital, Mortgage, among other offers.

2. The customer who needs 'to hide his dark side' securely in a strong and safe box (the bank).
It will contact with the bank to choose the best service to keep its money safely.
Can be a Physical Coffer, a Current Account, a Savings account, a Time Deposit, an Investment, among others.

3. The customer who 'uses' the bank services to executes its Standing Instructions and others like:
Utilities payments, Installment payments, Periodic Deposits, Internet shopping, Cards debit/credit, Blockchain settlements, among others.

Now, if the bank's customer discovers that the bank goes 'to spy' its 'dark side' (Customer's 360 degrees view), the 'trust' weakens.

So, the KYC on the banks should be different of the KYC of others industries.

Again, in my simple view, the customer is who should have a 360 degree view of the bank, itself managing its money, and not the other way.

So the right way to the banks win customers is providing tools that allow customers to 'manage' their assets/liabilities/services in the safe box, seamless and intuitively, without having to go through multiple product's menus and other barriers.

To achieve that, the business in the bank must be treated corporately instead of by line-of-business.

Here comes the turning point, the new paradigm in the banking business, in which I am working with.

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Consultant to Fintech firms selling to, or partnering with, banks. Services include fractional Customer Success Executive, custom sponsored webinars, papers, etc.

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