How Fintechs can Partner with Banks - Challenges and Opportunities

Most fintechs want to partner with banks - but it’s easier said than done. While banks are more open than ever to collaborating with outside parties, fintechs struggle to comply with stringent standards and outdated onboarding processes. 

Why banks partner with fintechs

Banks are in constant competition with one another, working with the same regulations and base interest rates to win customers. Developing new technologies and experiences is an important task for banks to retain and attract customers. Traditionally, banks built new capabilities with internal design, product and development teams, requiring long-term investment and human capital challenges.

Fintechs offer another option: integrate third-party solutions with the existing product stack. This approach has steadily increased in popularity, with each fintech focusing on a small section of a bank’s product stack, quickly bringing to market advancements that internal development teams often cannot match. Fintechs are also able to enact economies of scale to decrease costs and don’t require banks to employ teams of experts.

At a time when many fintech firms' market capitalisations have declined, partnering can also be a good way to kick the tires on potential acquisition targets. A 2022 survey by EY-Parthenon revealed that 55% of banks expect partnerships to play a “very important” role in their strategies by 2023, demonstrating the building demand from banks to collaborate with fintechs.

Meeting high-security standards

In order to comply with data and consumer protection regulations, banks operate at high levels of security throughout their tech stack, customer relations and general operations. Fintechs aiming to work with banks need to be able to meet the security standards thresholds of bank vendors, which is no mean feat. 

This task shouldn’t be underestimated, requiring a large commitment of time, capital investment and technical resources, presenting a clear challenge for fintechs operating in a lean structure. A good place to start is compliance with general government standards for data security, including SOC 2 in the US and GDPR in Europe. Banks and governments also regularly require fintechs to adhere to additional payment compliance standards, including the global PCI-DSS guidelines, regulating the way consumers’ financial data is processed.

Tackling onboarding hurdles

Once a fintech meets a bank’s cumbersome security requirements, the onboarding process may begin. Less tangible barriers begin to emerge, owing to a number of common bank inefficiencies. 

Extensive risk and compliance procedures are often one of these barriers, requiring fintechs to meet standards first put in place to evaluate an earlier generation of technology. However, banks are beginning to improve their onboarding processes by building partner-specific business models and outsourcing risk management procedures, helping to reduce the time between agreement and launch.

It's also important that fintechs and banks rigorously assess every partnership to ensure strategic alignment, as surprises during the onboarding process concerning market opportunity and integration with the bank’s wider tech stack are costly and time consuming for both parties.

Banks are key consumers of fintech products and services, but many of the associated challenges are under-reported. Complying with security standards is time-consuming and costly, and integrating with banks is often an arduous process. However, if fintechs are well prepared for these challenges, they are on their way to a successful partnership.