There has been a change in the mindset of community banks and credit unions concerning FinTechs. This change was initiated before the pandemic changed our reality. Instead of considering FinTechs as an enemy or too risky to engage with as partners, institutions began to find ways to work with FinTechs and incorporate their innovations into their customer-facing systems.
As financial institutions start to plan for post-pandemic competitiveness, finding ways to incorporate FinTechs is vital. During the pandemic, by necessity, consumers increased their digital channel use in order to meet daily needs. As a result, experienced e-tailers such as Apple, Carvana, and Uber Eats thrived.
These e-tailers often added a level of value to the lives of consumers that well exceeded that offered by banks and credit unions. Innovations offered by FinTechs are the best source available to institutions to meet the new level of expectations customers have developed from these experiences. Structuring partnerships with FinTechs is different from doing business with the established legacy technology providers they are used to depending on.
Institutions that insist on vetting FinTech partners the way they do a core processing or digital banking partner will find it difficult to establish a relationship with them. FinTechs, by definition, are startup or early-stage companies founded by individuals not necessarily from the financial services industry. They are usually privately owned and have investors interested in a future exit that allows them a return on their initial investment. These variables introduce areas of risk not experienced by institutions in their other business partnerships.
These areas of risk are not insurmountable. There are several areas where gathering the right information can aid a community bank or credit union get comfortable with establishing a FinTech partnership.
- Motivation: Do the values, motivations, intent, and goals of the FinTech fit within those held by the financial institutions?
- Growth Vector: What growth does the FinTech expect year over year and how can it be validated?
- Cash Burn: How much cash does the FinTech have on hand, what is their monthly burn rate, and are additional infusions of cash expected?
- Backing: Who are the investors, what success rate have they demonstrated, and how active are they in the FinTech?
- Exit Plan: When and how do the investors plan to monetize their investment in the FinTech?
Assuming the answers to these core questions are satisfactory, a bank or credit union must determine what shape the partnership should take in order to have the greatest chance of success.
- Type: What form will the partnership take? Will there be a prototype or pilot? Will the institution white label the FinTech’s offering, or will it be offered to clients under the FinTech’s brand? Will it be a referral arrangement, or will the bank or credit union distribute the FinTech’s offering?
- Form: The type of partnership will determine the form it will take. Will the offering be integrated into the institution’s IT landscape, or will customers and members be using the FinTech’s offering hosted within their IT environment? What is the timeline for getting the innovation to market? What resource commitment is required from the two organizations?
- Owners: Who owns the relationship at the institution and at the FinTech? How much skin is in the game for the owners of the relationship? Are they directly compensated on the success of the relationship? Between the two entities?
- Trust But Verify: How will information related to the FinTech’s overall “health” be shared with the institution? How often will it be provided?
- Failsafe: What allowances are made in the partnership for the worse case scenario? How does the agreement between the entities capture the variables that would come into play in the case of a “divorce”?
JP Nichols, cofounder of FinTech Forge and the Alloy Lab Alliances, and instructor at eight banking schools, believes that institutions that do not find a way to partner with FinTechs to help meet the needs of their clients face a grim future. Nichols comments, “If financial institutions cannot be truly customer intimate, they are doomed to be just dumb commodities, acting behind the scenes, like utilities.” In a post-pandemic world, community financial institutions have even less time than they did before COVID-19 to avoid this fate.