Many in banking think of fintechs as a threat. A big one.
Recall Jamie Dimon’s declaration last April, when he told analysts that JP Morgan Chase should absolutely be “scared s—less” about the threat of fintech.
But that grabber of a quote doesn’t really capture the situation. Dimon was talking about firms like PayPal, Square, and Stripe. These are hardly what most consider fintechs these days.
The vast majority of fintech firms are not world-striding behemoths. Rather, they are thousands of small companies building new and exciting means to simplify, if not transform, how customers interact financially.
And if you’re a bank, that’s not necessarily a bad thing!
In fact, there’s a good chance of finding mutually beneficial ways of working together. How might that work? Let’s look at three examples.
One way for a bank to work with a fintech is through a partnership arrangement that uses the fintech’s innovative products to open up new channels of customer acquisition. Such arrangements are generally the simplest way for a bank to work with a fintech because the effort required is more contractual than technical.
In the lending arena, a great example is Greensky, a fintech founded in 2006 that went public in 2018. Greensky provides financing to customers in the home improvement and healthcare sectors.
Greensky is not a bank, so it partners with multiple banks, like SunTrust and Fifth Third, to provide the actual funding. Greensky takes care of sourcing the loans, and the banks get volume with little of their own effort. Win-win.
The Integrated Fintech
A second popular way to work with fintechs is to integrate a fintech service into a bank’s operations. In these scenarios, the bank becomes a customer of the fintech to increase the value of its offerings.
One popular example is the integration of a fintech’s automated investment advisor (a.k.a. “robo advisor”) into a bank’s web and mobile investment apps. This approach provides a fast route to offering cutting-edge capabilities that typically take much longer to build internally.
For a more robust example, take BMO Harris. The US-Canadian bank wanted to improve their digital lending experience, and rather than building something in-house, they partnered with Blend to power their cross-channel lending capabilities. It’s still BMO Harris’s offering – just enhanced with a fintech’s technology.
The integration of a fintech almost always entails more effort than the Partnership offering, requiring technology resources and investment prioritization. But it’s equally important to realize that this approach is fundamentally no different than integrating any third-party into a bank’s systems and platforms.
The third and (we think) most interesting example is the emergence of platform banking, or “banking as a service.”
This is exemplified by Cross River Bank, a relative a newcomer in the banking world, which was built to be tech-friendly from the start. Today, Cross River helps power fintechs such as Stripe, Coinbase, Affirm, and Dwolla by integrating its own digital banking services into the products of other non-banks.
What does that mean exactly? Here’s an example.
Let’s say a bank has a powerful anti-money laundering (AML) capability it uses when acquiring and transacting with clients. The bank could offer up – and monetize – that AML service to other non-banks and fintechs who don’t have the time or resources to build it themselves.
It is a significant undertaking to build a whole new set of products for a new market, requiring a different kind of infrastructure and mindset to do so. While Cross River built themselves from the ground up to offer banking as a service, BBVA had the more complex challenge of building a new business within an established organization.
In both cases, two fundamental capabilities were needed: 1) The right technology (no small feat in itself), and 2) The right process for maintaining the highest levels of security, risk management and regulatory compliance for a business where large parts operate outside the bank.
The platform approach is a much larger undertaking than either of the first two first examples. If done right, however, it can unleash an entirely new line of business, with a full array of financial and strategic benefits.
Find that Winning Combination
Don’t be scared.
The world of fintech can be much more about opportunity than threat for the banking industry. How a bank benefits from those opportunities depends on the appetite of an organization and its willingness to embrace the exciting new dynamics fintech offers
Further Advisory helps major financial institutions unleash value from their fintech relationships. From partnership strategy and due diligence to implementation and go-to-market, we make the business case become a reality.