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The Secret of Sustainable Relationships Between Banks and FinTech Startups


The relationships between banks and FinTech startups have been a hot topic for a while now. If 2015 seemed to be a race, 2016 may bring a fundamental shift in the way traditional players and newcomers interact.

The drastically increased financial support from banks to FinTech startups in their desire to leverage the innovation came from a realization of the fact that there is a FinTech startup for almost any bank service nowadays. A wide range of accelerators and incubators backed by major banks have flourished to attract the most promising startups. Interestingly, it's not only banks that have been actively exploring opportunities with startups. Over the course of several years, tech giants like Microsoft and Google have been “silently” getting their hands into FinTech to fill their gadget-stacked pockets.

However, there are always unsuccessful ventures behind a successful one. The legacy systems, bureaucracy, rigid mindset, risk-retention and a range of other factors can serve as inhibitors for major players on their way to collaborate and innovate with fresh minds. Even though the marketplace always carries uncertainties for the players, there still are important factors that can ensure long-term success in relationships between established players and FinTech startups.

One of the largest European banks was among the first traditional financial institutions to realize the importance of collaboration. Deutsche Bank has recently published a paper on FinTech 2.0, calling banks around the world to collaborate with FinTech. While each bank can find its own way to build relationships with FinTech, there are certain common factors that can ensure the success of those relationships.

Aside from the prerequisite of the right choice of the partner, there are contributing factors that are not less in importance. The cultural environment that is generated alongside the financial and technical components is one of those factors that is suggested to be extremely important for partnership sustainability.

Strategic partnerships can be successful only when the clear-cut roles and predefined responsibilities are set from outset to distribution. Deutsche Bank suggests that it might be decided, for example, that once the solution is ready for market, it is the role of the bank to trial the solution in one of their innovation centers, then soft-launch the solution among selected clients and finally leverage their existing client base to distribute the offering. The suggestion comes from an important difference between banks and FinTech startups: the first ones have resources—that’s why the “burden” of execution logically has to be on banks.

Another important factor is that partners should be aware of the potential damage of the “scope creep,” which can be avoided by implementing accurate and detailed blueprints from the start. In order to be commercially viable, strategic partnerships must be long-term and sustainable. For both parties, complete stakeholder understanding and buy-in at the beginning of the partnership is important for ongoing harmonious productivity.

There are two crucial areas of compatibility serving as success factors: mindset alignment and technological compatibility.

Mindset Alignment

An adaptable attitude, open to potential shifts in mindset is necessary on both sides. No matter what the size and financial power of the collaborators is, in order to fully leverage the opportunities, banks must approach the FinTech counterparty as an equal partner rather than a vendor. The equal intellectual value of the venture parties is one of the most important factors that predict success.

It would be unethical to blame banks for their unwillingness to take high risks in attempts to innovate. To an average customer, another service or capability looks like a simple task to add to the value chain. However, the strictly regulated nature of the financial services industry forces banks to be extremely cautious when it comes to the implementation of innovation. Banks have concentrated funds of millions of customers who depend on them, which don’t allow banks to play around with every innovative solution in the market. Nonetheless, extreme rigidity is not an answer either.

Banks’ attitudes to risk may also need adjustment. It may be necessary for banks to adapt the ways in which they accept and mitigate risk—whether regulatory, reputational or in data-management—throughout a FinTech partnership. Banks are accustomed to viewing smaller or less-established corporates as risky in a vendor role; but the very nature of FinTechs means that they are usually new players, perhaps with untried and untapped potential. In part, this can be solved through due diligence, but it also requires a novel approach to collaboration.

There are certain important things Deutsche Bank believes financial institutions need to accept for the commonwealth of the industry. First is the need to invest time and resources into digitization as reality is proving the rise of digital and success of mobile banking as a service and concept. Moreover, as digitization hasn’t become mainstream yet, it can serve as a new differentiator for banks.

Secondly, banking industry professionals have to accept that existing business models will have to change, and could even be cannibalized through new alliances with FinTechs. Leadership and talent are becoming more important than effective management. Complex multilevel human resources systems built by the banks may need to go through a significant transformation for the sake of a prosperous future. As suggested by the bank, senior management must have a strong vision to successfully lead the transformation into the digital age. Middle management must hone its crucial “assessment and judgment competency” to decide which ideas are worth pursuing. On-the-ground staff can be a main source of innovation when empowered and supported.

Another important implication of shed traditional management systems and increased speed of decision-making processes is that solutions must be able to reach the top without cultural or hierarchical obstacles.

One may have noticed in this line of logic that most parts of factors are related to banks and their responsibilities and changes. It seems unreasonable to believe that only banks should be putting in the effort to transform and ensure successful collaboration.

They will also need to be sensitive to the process that banks are currently undergoing, which involves deep and rapid shifts to the sector and to traditional business models. In addition to inverting attitudes to recategorize new players as allies rather than competitors, banks are currently re-assessing and refining their long-term digitalization strategies. FinTech must be accepting of the disparity in the pace of change between long-established banks and new, nimbler players, and be willing to cooperate and align themselves with bank efforts to integrate. In fact, FinTech should be wary of underestimating the adaption to the regulatory environment and end-to-end due diligence necessary on their side in order to work with banks.

Technological Compatibility

Aside from the mindset and a culture, there are also undeniable technical factors at a place when it comes to finances. As the banking industry hasn’t seen major changes in operations and business models, the legacy systems’ rigidity can become significant obstacles on the way to transformation. In order to fully take advantage of collaboration, banks and FinTechs need to ensure that technical compatibility and connectivity is in place before embarking on a partnership, even if it means technological updates and infrastructural overhauls for banks.

The ever-open and debatable question of APIs is one of the most complicated areas. On one hand, banks are willing to partner and foster innovation; on the other, open banking APIs can empower competition and shutter the chances for banks. Going forward, banks will need to embrace APIs as a protocol that allows them to communicate with clients in real-time in an almost unlimited manner. This will be crucial for new solutions reliant on accessing up-to-date bank data such as FX rates; failure to use APIs in these instances could leave such solutions open to risk.

The ideal partnership, as suggested by Deutsche Bank, is one that does not require overly heavy investments into achieving connectivity, but easy, low-cost connections will only be possible if banks’ infrastructures are up-to-date.

Probably, one of the most important things for banks to understand is that no matter how well they are prepared and how efficient the execution is, there is an undeniable risk of failure associated with the opportunity for success. Ultimately, entering into any partnership will require adaptation and flexibility from both sides. But these challenges are dwarfed by the wealth of potential.



MEDICI Team is a group of content writers, bloggers, journalists, researchers, and editors from the MEDICI team who collaborate to create FinTech insights.

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