As the benefits of partnerships between banks and financial technology (fintech) organizations have become more evident, bankers’ fears of being displaced by the wave of fintech startups have cooled.
Increasingly, bankers see that taking on a fintech partner can enable them to offer new products and services, develop new delivery models, and enhance the efficiency and effectiveness of back-office functions.
And yet, despite the growing awareness of the value of these partnerships, dispositional mismatches between banks and fintech companies have caused banks to struggle to make these partnerships work.
One of the most common sources of discord is in the area of risk management. Bank risk and compliance professionals are wired to mitigate risk rather than to manage it. The urge to shelter banks from risk through traditional risk and compliance practices, however, can dampen the innovation that is at the core of fintech’s appeal.
Banks aiming to get more out of these partnerships should review and hone their operations, aligning business goals and risk management goals across strategy, culture and information sharing.
Strategy Trumps Granular Problem-solving
Fintech companies and banks entering into partnership agreements often fail to effectively think through and communicate about their individual corporate strategies and how the partnership fits in.
Banks might approach a partnership with a problem they would like the fintech company to solve, without clearly defining how the partnership fits into their overall business strategy.
An important first step for banks is to think of a fintech engagement as a true partnership, rather than a vendor relationship.
The two organizations should sit down together to collectively identify the objectives and goals of each organization and how the partnership can advance those goals.
Going further, both organizations should establish boundaries around what they are willing to do to achieve their objectives, what resources will be made available to deal with challenges, and what will trigger the escalation of an issue to executives’ attention.
Ultimately, the purpose of the partnership must be clearly tied to the broader strategy of each organization, and at the outset, the partners should establish a process to ensure that purpose and strategy will remain aligned.
Meet at Cultural Crossroads
Fintech companies and banks often experience a culture clash at the outset of a partnership. The more traditional culture of a bank can seem starkly different from that of an innovative and fast-moving fintech company, particularly in the area of risk tolerance. While banks often view any loss adversely, fintech companies are much more comfortable with the idea of taking a small loss in the spirit of innovation and learning.
This question of culture fit rarely is considered in the traditional vendor management process. But finding a way to align the two, often disparate, cultures is critical in forging a successful partnership.
Both parties should evaluate prospective partners’ values at the outset. Once a partnership is formed, the parties should establish a set of principles that define practices and policies that are deemed acceptable on both sides. This set of principles should be viewed not as rules per se, but as broad guidelines.
Another important aspect of culture is how both organizations treat failure. Rather than taking a punitive approach to all failures, banks should be open to the idea that some failures can be positive if they advance innovation.
Fintech companies sometimes are hesitant to share their data, either because they consider it proprietary or because they simply do not know what data banks want. On the other hand, banks, particularly in light of privacy regulations, might be hesitant to share information that does not directly affect the partner relationship.
Both parties should work to overcome barriers to information sharing, as the degree of transparency in a partnership is directly related to its success. With more data, partners can better assess performance and identify unforeseen compliance risks that emerge.
As in the case of strategy and culture considerations, expectations defining the process and extent of data sharing should be set up front. Banks should consider what information they can provide to fintech partners that might not be directly related to the product – but which might help grow the strategy or solution.
Competitive Advantage Through Thoughtful Partnerships
By establishing some basic principles around strategy, culture, and information sharing, bank executives can make better decisions as they enter into partnerships with fintech companies. Poor execution on fundamentals should not be allowed to hamper the successful execution and growth of these partnerships.