Bank-Fintech Partnerships Are Under-Performing: What’s Going Wrong?

OBSERVATIONS FROM THE FINTECH SNARK TANK

Bank-fintech partnerships are a hot topic in bank boardrooms. A new report from Cornerstone Advisors, titled The State of the Union in Bank-Fintech Partnerships, found that nearly nine in 10 financial institutions consider fintech partnerships to be important to their business, up from 49% in 2019.

Overall, 65% of banks and credit unions entered into at least one fintech partnership over the past three years, and 35% invested in a fintech startup.

Fintech partnership activity among banks has accelerated over the past three years. In 2019, banks that partnered with fintechs averaged 1.3 partnerships per institution. That number grew to 2.5 partnerships in 2021.

For banks that have invested in fintechs, the average investment has increased over the past three years. Their average investment in fintech startups grew from $2.3 million in 2019 to nearly $10 million in 2021.

Bank-Fintech Partnerships Results are Disappointing

Why do financial institutions partner with fintechs?

Increasing loan volume and loan productivity were the most frequently cited objectives, followed by new product development, mentioned by nearly half of respondents. This is a big change from 2019, when just 32% of financial institutions said new product development was an objective of their fintech partnerships.

Fintech partnerships are falling short of financial institutions’ objectives, however. Just 28% said they’ve seen a 5% or better increase in loan volume, and only 14% have realized at least a 5% gain in revenue from new products as a result of partnering.

Why Do Bank-Fintech Partnerships Fall Short?

Banks experience a host of technology-related issues in their attempts to partner with fintechs. Specifically, they cited integration with core and ancillary systems, digital banking platform integration, and lack of API experience as challenges.

There are a couple of other contributing factors, that banks may not be considering, however:

• Inefficient organizational structure. Of the institutions that have personnel dedicated to fintech partnerships, a third have a centralized team charged with identifying, vetting, negotiating, and deploying fintech partnerships, while nearly have dedicated personnel distributed throughout the organization. Execs interviewed for the report, however, said that a hybrid model—a centralized team and other personnel in the line of business was the most effective approach.
• Insufficient personnel. Just over half of all financial institutions have no personnel dedicated to financial partnerships. The institutions in the $1 billion to $10 billion asset range with dedicated personnel average about 2.5 full-time equivalent staff members. How many partnerships can an organization identify, vet, negotiate, and deploy with 2.5 people?
• Lack of a partnership competency. Identifying, vetting, negotiating, and deploying fintech partnerships is a new endeavor for most financial institutions. People from the IT department and lines of business may be experts in what they do, but that doesn’t necessarily mean they have the skills and experience to lead fintech partnerships. And the last thing a bank should do is put someone from procurement on the fintech partnership team.

It’s Time to Reboot Bank-Fintech Partnerships

For many banks, fintech partnerships are a hobby that they’re dabbling in. Maybe it’s to appease the board, who’s breathing down the necks of the management team to do something “fintech-ish,” or maybe they’ve convinced themselves that by partnering they’re “innovating.” I don’t know.

What I do know is that banks need to up their partnership game by establishing effective organizational structures, staffing up their efforts, and operationalizing the execution of their partnerships—just like they do with other business processes.

Luvleen Sidhu, CEO of BM Technologies, advises banks to put a number of practices in place when partnering:

“When entering into partnerships, banks and fintechs should: 1) Establish a governing body with executives from both sides to ensure quick decision-making on critical partnership issues; 2) Establish an engagement and review model with daily, weekly, monthly, and quarterly touch points to ensure objectives are being achieved and progress is being made; and 3) Develop a clear framework for compliance reviews and approvals.”

Organizationally, banks committed to growing through fintech partnerships need a hybrid organizational approach to partnering: 1) A centralized team that can identify, vet, and negotiate with potential partnerships, and that can determine the technical integration requirements, and 2) Personnel who report into the lines of business that own the fintech partnership relationship and have accountability for business results.

There’s a lot of work to be done here, bankers.

For a copy of the report The State of the Union in Bank-Fintech Partnerships, click here.