Four keys to successful partnership to pave the way for open banking
By Dan Drees
The popular narrative over the past several years was that traditional banks and financial technology companies were on a collision course. With both camps seeking to satisfy rapidly evolving expectations from individuals and businesses, direct opposition seemed inevitable.
But as the race ensued, an unexpected answer emerged: Collaboration, not competition, might be the best path to success for both banks and fintechs. More than half of banks and credit unions surveyed by Cornerstone Advisors cited fintech partnerships as important in 2019. Of course, there are those who feel such partnerships will lead to disappointment, but even that dissent is based more on expectations of executional flaws than a disbelief in the strategic sense of these potential pairings.
Many traditional banks are longstanding institutions that deliver resources, relationships, brand recognition, credibility and trust. But they’re also stuck in established processes and often strapped with legacy technology that impedes developing new solutions to effectively address the challenges of their customer base.
In contrast, fintechs are developing the solutions that customers want while maintaining the agility and technical competency to adjust those offerings according to the evolution of demands. But as the comparative newcomers, they typically carry less credibility and market access to prospective customers compared to banks.
These dichotomies are why building strategic relationships allows banks and fintechs to tap into the other’s strengths for mutual benefit, creating a unified financial services and technology machine that has the necessary speed to respond to the market and adjust as needed. Entering into strategic partnerships now is essential to the future of both entities, as partnership is the first step toward capitalizing on innovations that will define financial services and fintech moving forward.
It’s been years since the initial boom of fintech startups, so why did it take this long for banks and fintechs to form a truce? The evolution of the customer is finally reaching a tipping point, where initial awareness and interest have developed into full-on expectation and demand. Coupled with increasing competition in the market, this has created the perfect environment for partnerships.
Today’s consumers are accustomed to intuitive user interfaces, real-time data access and more personalized experiences than ever before, and they expect the technology used in their personal lives to be reflected in the workplace as well. This is creating increased pressure and a significant need for rapid development and delivery of new products and services.
As competition heightens to deliver those products and services, banks and fintechs who try to go it alone are finding themselves falling behind. Too many are burning resources in attempts to create and sell their own version of the wheel, leaving a more confused and less trusting marketplace in their wake.
What creates a successful partnership?
While many decision-makers view entering a promising new partnership as the initial stage, it’s actually part of a lengthy process that should be preceded by the following four steps:
1. Develop a strong understanding of the challenges you’re trying to solve for
Too often, people lose sight of the original problem when trying to drum up the solution. Banks and fintechs must recognize the other’s existing offerings and product gaps in order to determine the appropriate solve. What problems are you trying to address for customers? How can your solutions and services be combined to respond effectively? Pinpointing the specific area of opportunity in advance will ensure everyone is aligned on objectives and what “success” looks like.
2. Start small and then scale
Once you identify the area of opportunity, focus on one initiative at a time and build the partnership from there. Trying to go to market with several different solutions at once will spread initial resources too thin and prevent you from effectively testing what works and what doesn’t with the target customer base.
3. Dedicate the right resources
Every initiative needs resources — time, people, funding — in order to be successful. For example, expecting to sell a product without dedicated sales representatives will never work. Both the bank and the fintech must invest to build the right team to lead the partnership.
4. Let integrations drive execution
A siloed, disjointed experience will not beat out competing solutions in today’s market. Delivering an integrated, unified user experience is table stakes in the current landscape, so prioritizing necessary connectivity and back-end functionality is critical to capturing new customers. Allowing integration opportunities to inform the larger strategy and tactics will ultimately yield the best results.
The next phase of fintech and bank partnerships will revolve around open banking as the catalyst for collaboration. Open banking, essentially the concept that banks should provide a set of application programming interfaces, will open the door to a new realm of possibilities for fintechs to develop specific products that integrate with any bank platform or service. With lighter lift connection points versus time-consuming custom integrations, both sides can be more proactive in working collaboratively without requiring the same depth of resources to support each new relationship or product.
Open banking at its core requires partnerships between banks and fintechs to be successful. It has the potential to significantly alter the way financial services are delivered both to consumers and businesses, but it also raises questions regarding regulation and data privacy. Through this model, the bank and fintech become stewards of client data as the information is shared, making it the responsibility of all parties involved to take the necessary measures for protection. This requires banks to sacrifice some degree of control — both in data sharing and opening legacy systems — something they haven’t historically been as receptive to.
Only time will tell whether open banking will progress as it has in the U.K., which U.S. banks will take further steps toward adoption, and subsequently which fintechs will capitalize on the opportunity. But either way, it’s safe to say that banks and fintech partnerships are critical to pave the way for open banking and will play a pivotal role in the way both do business moving forward.
Dan Drees is a fintech expert and industry veteran with more than 25 years experience helping teams at Fortune 500 companies and financial institutions, such as GE, Bank of America, Ally and Capital One, generate next-level growth. Prior to joining AvidXchange, he led the fraud and risk solutions business at Fiserv, where he focused on enabling financial institutions and their clients to reduce the cost and complexity associated with fraud through process automation and the use of next-generation data analytics.