By Lisa Gold Schier and Hoa Nguyen
When searching for a digital solution to transform customer relationships, banks tend to juggle between two options: deciding to develop in-house and partnering with a fintech firm.
Central Bank of St. Louis, Mo. was not immune to this dilemma.
The bank, however, managed to arrive at a decision after doing a cost analysis of its two alternatives—building the system in-house versus cooperating with its potential fintech partner, Geezeo, which specializes in enriching the digital banking experience by offering transaction data augmentation, personal financial management and customer segmented marketing solutions.
“We realized that collaborating with a fintech firm would be the best of both worlds. Not only would their technology adapt to our needs but it is also less expensive and time consuming than developing a system of our own,” says Matt Tollerton, director of e-commerce at Central Bank.
While cost is one of the immediate concerns, the time it takes for fintech partnerships to work can also seem daunting to banks. Just ask Brad Scovill, CEO of Citizens & Northern Bank in Wellsboro, Pa. “As an industry, we need get beyond viewing things simply from a project management standpoint. We need to speed up the development process, address compliance and risk concerns, while managing the relationship to support growth,” says Scovill.
Leslie Andersen, CEO of Bank of Bennington, Neb., adds another perspective. Andersen’s bank is currently working with a local company to develop a unique automated loan point of sale system where customers own and control their data. While the technology development is on track, the bank didn’t fully anticipate the length of time needed to set up a joint venture. “Addressing the legal requirements is a learning experience for everyone, especially explaining what a bank can and can’t do from a regulatory perspective. The business model and operating structure take time to develop and you still need to run the bank,” she says.
Although each partnership is unique and there could hardly be a one-size-fits-all formula for success, consider these do’s and don’ts as you move forward with your fintech partnerships.
- Do – Define the problem you are solving for and then look for solutions.
- Don’t – Chase the shiny object. It is easy to become enamored with a product and try to fit it into your offerings. Implementing a solution that doesn’t solve the problem you are trying to fix ends in a net loss and damages the credibility of both parties.
- Do – Take an efficient approach and focus only on those fintech firms that fit with your strategy. Determine if you are going to work with the fintech as a vendor or as a partner. Different parameters or structures are necessary for different approaches.
- Don’t – Take every meeting with each fintech firm that reaches out—and don’t view every fintech relationship as the same.
- Do – Understand the short and long term strategic direction of the fintech and their understanding of the banking industry.
- Don’t – Underestimate the value of a strong management team that has insight and experience in banking.
Culture, communication and collaboration:
- Do – Discuss and start to develop a company-wide culture for innovation that fits your institution. Integrate innovation into your strategic planning and budget process. Involve key members of your team and keep up with industry research. Call in compliance, risk and legal early. Incorporate marketing, training, education and other internal stakeholders into the product roll-out. Train employees to understand the problem solved by the solution so they can both use the system and educate clients.
- Don’t – Set up one innovation person or an innovation department that is set aside from the rest of the bank.
- Do – Think about all the areas of the bank that will be impacted by the new technology and develop a comprehensive roll-out and communications plan. Tell the story of why you are partnering to the board and other key stakeholders.
- Don’t – Isolate the partnership to only the area that is directly impacted by implementation.
- Do – Think of fintech firms as potential strategic partners, consultants or advisors. When you invest the time up front with a fintech partner, the out-of-pocket time and cost are much less than you would have spent developing the solution yourself. In the spirit of partnership, you may want to provide business guidance to the fintech firm, such as explaining what business insurance is, whether fintech firms need cyber insurance or what multi-factor identification means for banks.
- Don’t – Expect the fintech partner to fully understand each bank’s strategic focus, appetite for innovation and market at first.
Risk and requirements:
- Do – Align your risk appetite to strategic business objectives. Talk to your regulator early. Find out what concerns they have and address them.
- Don’t – Start out by saying it can’t be done. Take the time to evaluate the risks thoroughly and work through how to mitigate them.
- Do – Understand vendor due diligence will have challenges. For example, analyzing a fintech’s financial statements will require a different process than analyzing those of an established company. Include your CFO, CCO or others in early conversations with the fintech to understand viability. A recent Harvard Business Review article reported: “As digital companies become more prominent in the economy and physical companies become more digital, income statements too become less meaningful in investors’ decisions.”
- Don’t – Decide not to work with a fintech firm just because it doesn’t have audited financials.
- Do – Work with fintech companies early on any criteria that you must have from a vendor management perspective. Fintech firms can help by documenting their security standards, path security and how they protect customer information.
- Don’t – Expect every fintech firm to understand what the bank needs for vendor management.
- Do – Analyze data and share data standards. Establishing this early helps fintech firms adapt to your requirements.
- Don’t – Assume a fintech initially understands your data standards.
Timeline and terms:
- Do – Set realistic expectations on next steps and how quickly the bank and regulators can move. Be as upfront as possible with the fintech about your intentions to work with them, implementation of the technology and the timeline for doing so.
- Don’t – Think that fintech companies have ample time and resources because they have venture capital funding.
- Do – Negotiate contract terms upfront. If you are the first bank to integrate, negotiate based on the expertise provided as well as the time, expense and risk in being the first to implement. If you become a referring bank, think about revenue enhancements or discounts on the services you purchase.
- Don’t – Be an early adopter who spends time and resources evaluating the solution without first discussing and agreeing to specific terms.
- Do – Test and learn. Document issues and risks. Phase in roll-outs. Get customer feedback.
- Don’t – Predetermine customers’ reactions, as this can lead to failed uptake.
- Do – Think through contractual obligations and how you work with your legal team or outside council to address any concerns, especially if looking at investing. Understand nuanced and legacy laws and regulatory structures and how they may affect a partnership.
- Don’t – Leave this contractual discussion to the last minute, as it can hold up implementation/investment.
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 team offers 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. She is focused on bank/fintech partnerships and business innovation. Email: [email protected]. Linkedin.