Collaboration between FinTechs and Financial institutions - win-win?

Instead of the predicted cannibalization, an evolution is taking place in both the new and traditional financial services models, as companies begin to collaborate rather than compete for greater market share.  For FinTech entrepreneurs the time is now.  Research by Chicago-founded global law firm Mayer Brown suggests that one-third of the 70 financial services companies it surveyed plan to acquire a FinTech company in the next three years.

The opportunity is for a win-win outcome, which sees incumbents offering FinTech start-ups much needed distribution and volume boosts of both revenue and market share, as well as enhanced knowledge of regulation and compliance; while traditional banks benefit from improved innovation, enhanced customer engagement and reduced costs derived from tech efficiencies.  By collaborating on their strengths, financial services companies are more likely to be scalable, sustainable and well positioned for the future.

Despite the compelling rationale for collaboration, both parties must approach the interaction with due diligence, integrity and transparency, acknowledging and accommodating their differing cultures and infrastructures, if the proposed partnerships are not to dissolve into dangerous liaisons.  In the end any strategic acquisition will be based on phase 1 success that would have occurred with their initial reselling or distribution partnerships.

Mike Carter, CEO of the world’s leading online business valuation service, BizEquity below outlines the considerations that FinTech start-ups and established institutions should consider before partnering:

Assess fit and flexibility

Tech savvy millennials and City suits are an unlikely cultural combination.   Both sides must be willing to adapt and accommodate the other if the partnership is to result in mutually beneficial synergies rather than disappointment. Incumbents must be willing to collaborate, data-share and restructure internally, while FinTechs must become more measured, acknowledging the responsibilities and regulatory restrictions that come with scale.  In the end it will come down to the people on both sides who make it happen.

Establish success metrics from the start and achieve them

Vital to the success of the partnership will be mutual agreement on what defines ‘success’ for each party.  A clear pathway to ‘success’, which takes into consideration the full process - from contracting to development of proofs of concepts and pilots, to demonstrating results - should be established at the outset of the relationship.  Weekly delivery of the success metrics to the key executive sponsors on both sides is a a great way to keep success transparent to all.

Manage risk

FinTech innovators in the early stages of development can have unproven operating models.  An incumbent entering into a partnership with a FinTech must be cognisant of the risk it presents, particularly if it is in the early start-up phase with an unproven operating model.  Contracts and agreements should be carefully crafted to manage risk whilst allowing sufficient space for innovation and growth.

Leverage data assets

Traditional banks have deep data sets at their disposal.  This represents one of their most precious, yet underutilized assets. Clear expectations and agreements surrounding data sharing and ownership must be established at the beginning of any partnership to avoid frustration or data breaches.

Tech innovations can help traditional financial institutions to release value from this asset by extracting pertinent customer insights. Data can be leveraged to improve and expedite the customer journey, making it quick and convenient. 

Data can also help to manage risk.  Advanced analytics, together with a broader range of data sources, have enabled FinTech firms to test new risk management and underwriting models, resulting in costs efficiencies and expanded potential customer bases. 

Make it personal

In an age of ultra-personalised and highly targeted data-informed financial services, traditional banking products are in danger of being commoditized.  By harnessing tech innovations, incumbents can offer its customers a more tailored product - an approach illustrated by Goldman Sachs’ investment in Better Mortgage – and personalised customer engagement through developments such as VR and biometric solutions.

Un-bundle

Instead of a challenge, the unbundling of products to single services, offers an opportunity for banks.  Strategically targeting FinTech start-ups which have solved a single, meaningful problem for a specific group of customers and built a business model around it could represent a fresh revenue stream for established Financial Services providers.

Beware of the FAANGS

The critical question in the coming decade will be one of critical mass: will the collaboration between new and traditional financial services providers be sufficient to stave off the more intense competition posed by the tech Giants such as Google, Amazon and Apple as they threaten to unsettle the Financial Services ecosystem?    

Only by true and transparent collaboration can the combination of FinTech and established financial services operators hope to retain and grow their market share and keep the financial aspirations of the FAANGs in check.