Fintech startups excel at giving birth to new ideas—ideas that do not get shut down by IT departments worried about security or compliance, or legal departments worried about a lack of regulatory guidance, or finance departments worried about high costs and likelihood of failure. We use fintech startups and possibly your bank uses them, too.
When we started up our firm 16 years ago, you could count the number of banks “potentially interested” in our prospective service on two hands and the word “fintech” had not yet entered the lexicon. Today our company serves thousands of banks and processes billions of dollars in deposits every week.
We have found through experience that fintechs have a particular kind of life cycle, which is really a continuum, but which, for discussion’s sake, can be broken down into four stages: the Garage, Initial Growth, Rapid Growth, and Maturity. How a bank interacts with a fintech in each of these stages can help it to manage the level of risk it wants to bear, how much work it will have to expend, and how much value it might realize from that engagement. The big question, then, is when to engage.
Stage One: The Garage
This is the proof-of-concept stage. The reward for working with a garage stage company is potentially enormous. However, the overwhelming number of garage stage fintechs fail. Banks probably do not want to consider engagement at this stage unless the bank has a) an extremely experienced CIO, b) a robust risk-management system, and c) access to experienced legal talent. Also, most garage stage fintechs lack a culture of regulatory compliance, and they may also lack a secure environment around systems and data.
Stage Two: Initial Growth
Initial Growth stage fintechs are beginning to grow and acquire customers. They usually have compliance systems in place (although they are often weak and almost certainly lack adequate testing). Most of these companies will also have SOC reports. Do not think, however, that this means the fintech is necessarily buttoned up. Such reports merely help you perform your own due diligence, which will necessarily dig much deeper. But if your bank has the right skills, including the strong CIO, risk-management and legal expertise mentioned above, the initial growth stage can also be a very rewarding point to get involved with a fintech.
Stage Three: Rapid Growth
These firms are moving swiftly but are still short of sustained profitability. On the other hand, they can offer great competitive advantages for early bank adopters. The bank benefits from the experiences of earlier customers while avoiding most of the risks of working with earlier stage companies. A key benefit of working with these more mature types of fintechs is the likely presence of a formal cybersecurity program that incorporates recurring network penetration tests, vulnerability management and whitehat hacking.
Stage Four: Maturity
The mature fintech is a consistently profitable business that may have been around for a decade or more and has top people, products and processes. Security is a top priority at these institutions with most participating in the Financial Services Information Sharing and Analysis Center and the FBI’s InfraGard Program. There is much less risk working with a mature fintech than with younger companies. One possible downside to working with a mature fintech is that they can only seem truly interested in their clients’ challenges at contract renewal time.
So there is no easy answer to the question of when to engage. Fintech companies at every stage have much to offer. Whether a relationship with a particular firm is right for your bank depends on its capabilities and risk tolerances—and what you are looking for in a partner. The best course in all cases is to perform deep due diligence on any potential fintech partner and check its references with other bank customers.