2024: The Beginning Of The End Of Bank-Fintech ‘Partnerships’

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OBSERVATIONS FROM THE FINTECH SNARK TANK

Prediction: By nan extremity of this decade, bank-fintech partnerships will beryllium a point of nan past.

This prediction flies successful nan look of caller manufacture trends. Fintech partnerships person been an important nonsubjective for banks for nan past fewer years. Cornerstone Advisors’ 2023 What’s Going On successful Banking study recovered that 70% of banks said partnerships were important to their 2023 business strategies, up from astir two-thirds successful 2022.

Bank-fintech partnerships person go inevitable successful nan eyes of immoderate manufacture observers. According to a Knowledge@Wharton article titled Why Partnerships Are nan Future for Fintech:

“As nan finance manufacture grapples pinch what nan adjacent procreation of banks and costs systems will look like, it’s clear that partnerships are a linchpin for riding nan activity of alteration successfully.”

What are banks trying to execute pinch fintech partnerships?

It’s much than conscionable providing banking arsenic a work (BaaS) services to fintechs. In Cornerstone’s study, 40% of banks cited improving lending productivity arsenic an important fintech business objective, 36% mentioned increasing deposit volume, and 31% listed expanding indebtedness volume.

The results from fintech partnerships person been little than stellar, however. Just 1 successful 3 banks person seen a 5% aliases much summation successful indebtedness measurement from partnerships, and half arsenic galore person realized astatine slightest a 5% summation successful non-interest income.

Why Bank-Fintech Partnerships Fall Short

There’s nary uncertainty that banks look technology-related issues—like integrating to core, ancillary, and integer banking systems, arsenic good arsenic a deficiency of API experience—when executing fintech partnerships. There are different contributing factors, however, like:

  • Insufficient personnel. Among banks pinch little than $100 cardinal successful assets, half person nary unit dedicated to financial partnerships, and those that person them conscionable 2.5 FTEs. How galore partnerships tin a slope identify, vet, negotiate, deploy, and standard pinch conscionable 2.5 people?
  • Inefficient organizational structure. Among banks pinch dedicated fintech business roles, a 3rd person only a centralized squad and different 3rd only person business unit distributed passim nan bank. Banks request a hybrid model—a centralized squad to grip IT integration and statement of business unit responsible for nan execution of nan partnership.
  • Lack of a business competency. Fintech partnerships is simply a caller endeavor for astir banks. Folks from IT and nan lines of business whitethorn beryllium experts successful what they do, but that doesn’t mean they person nan skills and acquisition to lead fintech partnerships. And it’s not a occupation for procurement.

They’re Not Really Partnerships

These shortcomings are fixable, but different rumor has go nan proverbial elephant connected nan table: Many bank-fintech partnerships aren’t really “partnerships”—they’re client-vendor relationships.

In a Forbes article titled Better Together: The Evolution Of Bank-Fintech Partnerships, ConnectOne Bank CEO Frank Sorrentino quotes Nathaniel Hartley, CEO of MANTL, astir really nan fintech builds ‘being a bully partner’ into its strategy:

“We return a consultative attack to our customer relationships to thief our customers extract meaningful worth from our technology. It is simply a differentiating facet and captious to maintaining successful, semipermanent bank-fintech partnerships.”

Note that Hartley referred to his firm’s “client” relationships. Hartley’s attack doesn’t conscionable picture a bully partnership, it describes what immoderate bully vendor aliases service provider must do. It’s being “customer-centric.”

The word “partnership” implies—if not means—shared consequence and reward. This isn’t nan quality of astir bank-fintech relationships, however—banks purchase aliases procure exertion and services from fintechs.

This is much than a terminology issue. Banks are already challenged by nan daunting task of managing tons of exertion and work providers. Calling a supplier a “partner” doesn’t minimize aliases alleviate nan vendor guidance challenge.

The Coming Decline successful Bank-Fintech Partnerships

This is besides much than a terminology rumor because of nan early of fintech. Despite nan angst that galore successful nan fintech abstraction (it’s not an industry) feel, fintechs person a agleam early up of them.

To oversimplify things, fintechs travel successful 2 flavors: 1) those that compete pinch financial institutions, and 2) those that support financial institutions.

What’s nan early of nan first group? They will:

  1. Succeed astatine competing pinch banks and go established players successful nan banking industry;
  2. Fail and spell retired of business; or
  3. Fail and pivot their strategy to connection their products/services done banks (see HM Bradley for a bully illustration of this).

What’s nan early of nan 2nd group? They will: 1) neglect and spell retired of business, aliases 2) win and go established players successful nan slope tech space.

My bet: By 2030, galore of those successful nan first group that pivot and connection their products/services done banks (#3) will beryllium acquired by banks, and galore successful nan 2nd group that win (#2) will be acquired by established slope tech firms for illustration FIS, Fiserv, Jack Henry, Q2, Alkami, NCR Voyix, etc.

This is hardly a far-fetched prediction—it’s precisely what’s happened successful nan slope tech abstraction for nan past 20 years.

What Banks Need to Do

The diminution successful nan stated value of —and attraction on—partnerships doesn’t mean, that banks’ usage of and engagement pinch fintechs will decline. Smarter slope will:

1) Refocus “innovation” efforts connected tangible process betterment and gross creation. The days of nan “fintech petting zoo” wherever bankers spell to their boards and constituent to their fintech “partnerships” pinch arsenic impervious they’re “innovating” is over. Banks request to find and prime vendors who thief them operationalize process alteration and caller product/service creation.

2) Increase their finance in—and usage of—fintechs. In galore ways, banks person go nan new task capitalists successful nan fintech space. According to Cornerstone Advisors, location are astir 500 community-based financial institutions investing successful fintech startups, averaging $4 cardinal successful backing per institution. What galore are not doing capable of, however, is implementing those fintechs’ solutions.

3) Change vendor action criteria. Vendors’ invention capacity needs to go a much important constituent of vendor action criteria. Filling gaps successful features and functionality is simply a full batch easier than helping banks innovate connected processes and products.

4) Make data-driven vendor decisions. How will banks cognize if tech vendors really unrecorded up to nan invention capacity requirement? Consultants will surely proceed to play a role. But banks request a much data-driven view. I’m keeping an oculus connected providers for illustration True Digital Network and Naya One (with its “sandbox arsenic a service” concept) that committedness to alteration this.

Last Word: The BaaS Morass

Just to clarify: The impending diminution of bank-fintech partnerships does not spell punishment for banking arsenic a service.

Just arsenic nan alleged “partnerships” described supra are really client-vendor relationships, nan aforesaid is existent successful BaaS, isolated from nan roles are reversed: Fintechs are nan clients, and banks are nan vendors aliases providers of services.

And don’t judge for a 2nd that nan Apple-Goldman Sachs blowup casts a antagonistic ray connected nan BaaS space.