Banks have always bought from technology companies. For many areas of banking, the products are identical or at least highly similar, the rules and regulations the same, and the systems complex and expensive to build and maintain. It just makes sense for banks to share systems. For example, one company provides the core servicing system for more than half of the mortgages in the United States.
"Fintechs can be chaotic internally due to rapid growth and a focus on entrepreneurial leadership instead of management"
So, what’s all the fuss about fintechs? So much so that it’s fair to put fintechs into an entirely separate category from traditional technology vendors, for these key reasons:
• Faster evolution. Very rapid technology change enables new capabilities at a furious pace. That includes mobility, cloud, fast networks, AI, and more.
• Lower cost of integration. Tearing out and replacing existing systems is daunting, but the ability to tack on new capabilities is easier than ever.
• Larger investment. With huge pools of money available for early-stage firms to build, sell, and develop products, they have the ability to lose money for years, unlike incumbent firms.
• Aggressive leaders — who are able to mobilize talent, money and partners in repeatable patterns.
• Competitive position. Perhaps most threatening, some fintechs are direct competitors, using new technology capabilities to try to pick off some of our most profitable businesses and ultimately replace us.
Opportunity or Threat?
Consider the mortgage origination system market. There are several high-quality, established vendors with capable systems. These vendors are judged by their investors on the traditional measures — profitability, return on investment, and risks. But as new technology opportunities emerge, these companies need to bring along their existing base of technology and customers while remaining profitable. Moonshot investment, especially in niches, is rare. Starting to compete with their existing customers is even rarer.
With only modest investment from the traditional vendors, a new batch of fintechs stepped in. These have been able to raise substantial capital from investors, endure largely, sustained large financial losses, and focus sharply where new technology provides high opportunities. They can hire talent from inside and beyond the mortgage technology industry, and make big investments (and take big risks) in areas where the traditional vendors can’t or just haven’t yet. They integrate to the multiple incumbent systems in place, which removes the daunting prospect of replacing those systems. Some are going beyond building technology — and taking on the business processes themselves.
For a bank, these events create both opportunities and threats. If your competitors adopt and partner with fintechs effectively and you do not, you risk being left behind. Which raises some serious questions banks should ask themselves: Can our existing system providers catch up? Will they partner with one or more of these folks? Can we compete by building our own? Will de novo competitors based on new technology capabilities, eat our lunch?
The marketplace demands that many established banks partner with fintechs in some form. I’ve had the opportunity of several such engagements and have studied others, and can offer six keys to making the partnership beneficial:
1. Be careful. As bankers with large installed bases, above all else, we seek not to harm. But fintechs can run with scissors. Before you put too many eggs in their baskets, be sure they have adequate information security, release control, and testing, legal protections, and financial security. They also sometimes have over-aggressive sales and may make promises they can’t keep (even more than your incumbent vendors!). Look behind the curtain.
2. Enable your partner to leverage results beyond the immediate deal. Many fintechs are looking for home runs. If you can provide help on that path, they may invest disproportionally in your success.
3. Understand your partner’s organizational and financial context. Fintechs can be chaotic internally due to rapid growth and a focus on entrepreneurial leadership instead of management. Your assigned team may not be plugged into product development, or the development team you are working with may not believe in independent testing. They may have lots of funds available, need cash in advance, or be right on the edge of solvency. If you know them, you can build better partnerships for both of you.
4. Build personal relationships at multiple levels. All companies are people, but small dynamic ones are even more so. The addition or departure of a small group of people can make a pivotal difference. Understand who matters and build the right relationships.
5. Put service levels and remedies into writing. Fintechs focus on new stuff. Ensuring that existing services are working well may not be a priority. Create commitment and clarity, and then install tripwires that create focus when service levels are breached.
6. Contemplate the end at the beginning. Fintechs, by definition, are taking big risks. They are often intentionally losing money (investing) in pursuit of growth. Consider and carefully think through the consequences of their failure, acquisition, a shift in strategy, and abandonment of your product or service. Build that into your contract and plans.
There are plenty of opportunities for mutually beneficial partnerships among firms of all sizes. These opportunities are continually increasing as start-ups proliferate, technology investment needs to accelerate, and globalization reduces barriers. Keep these tips in mind as you explore possibilities and sustain partnerships advantageous to all.