Just a few years ago, all of the fintech companies wanted to put traditional financial institutions out of business. Disrupt the industry!, they said.
Despite the fact that we still have over 6,000 banks in the U.S. alone, plus a similar number of credit unions, the industry has been disrupted. But acquiring new customers at scale is hard for fintechs, and now the talk is about the value of fintechs partnering with financial institutions, instead of trying to put them out of business.
That’s not necessarily any easier, it’s just a different kind of hard.
Many have focused on technology integration, getting new apps and systems to work with banks’ aging technology infrastructure. The technology-driven nature of many new innovations makes this necessary, but it is not sufficient.
Successful partnerships between fintech companies and financial institutions need go beyond technology integration to address these three elements:
The Three C’s of Bank/Fintech Partnerships
Building out an internal innovation team is not cheap. That’s why so few FIs have them, and why an increasing number are adding what I call “And-I’s“– employees with “and Innovation” tacked on as an additional responsibility to their existing job titles.
Banks and credit unions are recognizing the increasingly urgent need to update their products and processes to stay relevant with their customers and members, but searching for, evaluating, and vetting potential partners takes a lot of time and money too.
Often overlooked though is the cost of an inefficient innovation process carried out part-time by inexperienced people. Common traps include devoting too much time to planning and defining user requirements, and not enough time actually testing new ideas; and pursuing a random collection of “interesting” projects that do not tie into the organization’s strategic priorities.
Most senior executives at financial institutions have spent at least part of their career in a lending role, where they needed to make the right decision just about 99% of the time over the long run.
Entrepreneurs experiment with new ideas with an aim to fail fast and fail cheaply, because each iteration and pivot gets them closer to the right answer in the market. The venture capitalists investing in these companies know that close to half (or more) of them will fail.
Most banks and credit unions are not going to be leaders in product innovation, so partnering with more nimble fintech companies makes sense.
But partnering takes more than simple introductions between two different parties with vastly different approaches.
Successful partnership requires FIs to address their own culture to create space inside their own organizations that embraces change. Fintech companies need to understand the conservative nature of their potential FI customers and adjust their sales and development processes accordingly.
Fintech companies also need to understand that the ‘move fast and break things‘ ethos of Silicon Valley does not work inside a highly regulated environment.
Every new solution, no matter how cool the technology, has to be compliant if it is going to be used by a traditional financial institution. There is simply no other option.
At the same time, FIs need to recognize that regulation is always going to lag innovation, and they must take a more proactive approach in trying new ideas. The most innovative banks, credit unions, and fintech companies all have proactive relationships with regulators to try new ideas that will still be compliant.
Choosing to sit on the sidelines out of fear is not an effective risk management strategy.
Improving Interplanetary Relations
Yes, bankers and fintech entrpreneurs are from different planets, and I’ll leave it up to you to decide which ones have more inhabitants on Uranus.
It’s time to improve interplanetary relations. Bankers learn about the 5 C’s of credit in their first days of training, maybe it’s time they learned the 3 C’s of Fintech Partnerships.