In a world where bank-fintech partnerships are the best hope for payment innovation, Matthaeus Sielecki, head of working capital advisory – financial technology, Deutsche Bank, explores what constitutes best practice for such alliances.
As the financial services sector continues to undergo digital transformation, not only are products and services changing but business models and approaches to industry disruptors and potential competitors are also being radically reframed.
Many financial service providers have been refining their long-term digitalisation strategies. Now, though, providers looking to best serve customers in the digital age are making a mindset adjustment. Rather than seeing technology firms or larger digital ecosystems solely as competitors, both banking providers and technology companies are fast learning to think of each other as potential allies.
The reason is clear; such an alliance negates each partner’s weaknesses by drawing on the other’s strengths. The result is more than the sum of its parts, as the partnership is able to supply the high degree of innovation needed to satisfy customer demand for increasingly sophisticated products.
But for those banks and fintechs considering such partnerships for the first time, what exactly should they be looking for? Above all, prospective partners’ core competencies should be complimentary, not competing. Typically, the bank partner will contribute its extensive customer experience, tried-and-tested operational capacities, and well-honed risk management and regulatory expertise.
In turn - alongside a high degree of technical competence, innovativeness and knowledge of online behaviours - tech partners must be able to facilitate working outside the restrictions of bank culture and processes to deliver swift responses to market needs.
The bank’s-eye view
Banks must pinpoint precisely where fintechs will add value to their existing value chains. While essential, technological expertise is not everything -fintechs need staff from diverse backgrounds, including banking and regulation, to demonstrate their thorough understanding of the industry, as well as their willingness to meet bank standards. Indeed, some fintechs will have market-leading algorithms to rival banks’ AML and KYC checks, data handling and security processes.
Fintechs’ partnership requirements
Fintechs looking for a banking alliance must ensure any prospective partner is committed to offering support and financing in the long-term. Certainly, switching an in-development product to a new bank, if an initial partner were to withdraw, could slow progress so significantly that innovation could be left dead in the water.
Application Programming Interfaces or global interoperable formats such as SWIFT’s ISO 20022, can indicate a bank is dedicated to long-term innovation via collaboration.
Once identified, prospective partners must consider how best to structure their alliance - choosing a partnership model that suits both their objectives, as well as the type of organisations involved.
Amongst the strategic decisions to be made are whether the partners should collaborate on a joint product, market it under both their brands, or have the bank “white-label” a fintech offering as its own, paying the latter a licence fee. Furthermore, is the relationship exclusive, or open to additional partners? For instance, a fintech-bank pairing might bring in a new partner in order to roll out an offering to a region in which neither has a footprint.
Three models in particular appear to be gaining traction in the market. The first consists of a technology player - one with existing customer relationships and the ability to create engaging online experiences - partnering with a financial institution with no existing retail banking presence. Together, they create a new kind of online digital customer experience with a full suite of financial products - an example is PayPal’s venture with Discover Financial Services.
In a second model, a traditional bank can become a central platform connecting disparate and niche services from an ecosystem of alternative providers. The bank acts as a depository of trust, managing customer relationships, thus liberating the fintechs to meet customers’ banking needs at various points of the value chain.
A third model might see a bank collaborating with technology players to offer customers banking services seamlessly integrated into, and perfectly embedded in, their daily lives using a combination of virtual channels.
Finding the right fit
Whichever partnership model is chosen, the alliance needs to be long-term and sustainable; one of equals contributing comparable levels of intellectual value and commitment, with compatible cultures and objectives, in order to meet the needs of all stakeholders. By upholding these core principles, the pairing of a financial services with a technology company could indeed turn out to be a match made in heaven.