By Lisa Gold Schier and Hoa Nguyen
As financial technology gained momentum in the early 2000s, few could fully grasp its potential to disrupt the banking sector. That would soon change. Fintech firms proliferated, and industry watchers started asking hard questions about the future of banking. Now, nearly two decades later, the idea of fintech companies as disruptors has gradually given way to a vision of fintech firms as collaborative partners. Banks—and many fintech firms—have come to realize that both parties are better off cooperating than working on their own.
For some institutions, partnerships are already happening. For others, the obstacles seem insurmountable. Why the disconnect? In many cases, it comes down to misperceptions on both sides based on isolated processes, technology and expertise.
Let’s look at ways to overcome the roadblocks to these partnerships.
- Define the specialized rules of engagement for bank/fintech partnerships.
For community banks, a lack of both financial and human resources can present an immediate challenge to successful partnerships. As for fintech companies, some still view banks as unnecessary intermediaries, and prefer to establish direct connections with customers instead. Some collaborations are stalled by the way banks operate, which often lengthens the time it takes to create partnerships. It’s a mistake, then, to think that fintech-bank partnerships can be treated just like any other third-party relationship. “They can’t be treated as a third party because in many cases, they are fourth party, as the relationship includes the bank, the customer, the fintech firm and the core,” says Julieann Thurlow, president and CEO of Reading Cooperative Bank in Reading, Mass.
This type of misunderstanding leads to lack of implementation, uptake and customer adoption. Both banks and fintech firms need to have discussions early on and set realistic expectations regarding resources, time lines, feasibility, implementation, processes, regulation and outcome.
- Educate fintech firms that banks are not all the same.
It is commonplace to group banks by asset size into large, midsize, regional or community banks. But beyond asset size, many other factors differentiate one bank from another: location, business focus, risk tolerance, community, culture, board, business structure, technology budget and technology infrastructure.
Fintech firms should understand the connections (or lack thereof) between a bank’s core processor and other internal technology systems, such as online banking systems, lending systems and other operational support systems. Working with multiple legacy systems can create challenges when it comes to integration. Implementing a new technology will affect multiple business lines, from infrastructure, legal and compliance to communications, marketing and retail.
- Understand that not every fintech product presented is bank-ready.
Banks aren’t always aware that the product offerings of some potential fintech partners may not be ready for implementation. Banks may go down the evaluation path only to learn the product needs substantial additional resources to be integrated into the bank’s system. Opening these conversations up front can alleviate this issue.
Fintech companies should be clear with banks about where they are in the development cycle and what it will take from the bank to create a functional product and partnership. The bank can then make an informed decision about whether to wait until the product is further developed or collaborate with the fintech provider to push forward to development.
- Proactively work with regulators to clear the obstacles for partnerships.
Both banks and fintech firms need to understand how regulations will affect product rollout to determine the risks involved. Once banks have conducted a risk assessment, they can strategize on the steps needed to mitigate these risks. Collaborating with regulators early in the process has proven to work well for banks and fintech companies. Jason Henrichs, managing director of Fintech Forge recommends having a mutual respect for the challenges each side faces: regulatory pressure versus the need to grow the business.
- Prepare staff to embrace innovation.
Innovation within a traditional bank requires both an operational and cultural mindset shift. With the right attitude, tools and processes banks can be innovative. But it also requires more than simply adding “innovation” to an employee’s title. To build a culture of innovation, bank leaders need to understand that it won’t happen overnight. Executive management, board and appropriate staff must all be involved to make sure the bank learns this new language of innovation.
- Educate fintech firms on banks’ approach to risk.
Addressing banks’ risks and compliance needs should be top priority for fintech companies. While there won’t always be an answer to every question, banks and fintech firms can iterate along the way—and that is part of the learning and innovation process. Take this concise guidance from John Epperson, a principal at Crowe LLP: “Embed risk and compliance within the strategy of the organization. It gets right to the point and is implementable.”
- Don’t expect a one-size-fits-all formula for seamless integration.
Every implementation is unique and the amount of time it takes will vary. Plus, everyone has a different expectation and definition of “seamless.” Instead, focus on what is needed from both the fintech and the bank team that’s running the process and manage accordingly.
- Remember that customers’ expectations are based on their experiences with Amazon and Google.
Customers are now experiencing seamless interactions that are changing their expectations. Don’t be fooled into thinking they don’t expect this same experience from their bank. In the end, both fintech firms and banks are looking to solve a problem and enhance the customer experience.
As your company works through a fintech evaluation and partnership process, keep in mind that you are not alone. ABA closely follows all regulatory aspects in relation to fintech partnerships and has a team of experts who are constantly evaluating fintech products and their readiness for banks to use. ABA’s Endorsed Solutions is committed to offering the expertise to bridge the knowledge gap that currently exists between banks and fintech companies.
Lisa Gold Schier is managing senior vice president of endorsed solutions at the American Bankers Association. Email: [email protected].