Among fintech startups it’s no secret that pitching to and securing a banking partner is a long, complex, and often frustrating process. Indeed, these startups have chosen a sector that is by its very nature, conservative and cautious; with no physical production of goods or standardised, commoditized services- bank performance is based on return on capital employed. This calculation is often expressed via profits and loss accounting and, for those banks which are publicly traded, market capitalisation. In addition, banks must adhere to strict regulations designed to protect their customers and society that both rely on the banking industry's stability: failure to adhere to these standards can be fatal to a bank, either directly or indirectly.
This observation is not in any way a critique of the banking sector or a suggestion that it eases up on its safeguards by introducing new risks beyond those that it currently successfully measures and mitigates. However, let’s discuss a new reality in which banks can simultaneously protect themselves and innovate their way to enhanced revenue, working with young start-ups with much to offer.
First, let’s review the (quite valid) objections that banks often voice when debating an engagement with a fintech startup:
1. Young companies have a high failure rate. Whether from lack of business experience, unproven technology that is not bank-grade, or the absence of enough real-world scenarios to cover all relevant use cases, the percentage of start-ups that succeed long-term may be in single digits. Even when a particular implementation goes well there is no guarantee that a sufficient number of the fintech partner’s other projects will be successful enough to keep it afloat.
2. Limits on time and bandwidth of the bank’s team. Larger and more forward-thinking banks often have a dedicated innovation team focusing on introducing or developing new tools and technologies to streamline activity and drive revenue. (It should be noted that even in these organisations, these teams are often composed of newer and younger employees who are not entirely aligned with traditional business goals.) However, most banks have a modest number of “dedicated innovators”, individuals who find it easier to focus on quick hits and small successes rather than reimagining an entire paradigm. Finally, even with a compelling initiative, the IT team also needs to make itself available for extensive work: to integrate the partner's technology and play a significant role in the next steps when it comes to rolling the advantages of the new technology into other parts of the bank to leverage the benefits as widely as possible.
3. “Run the bank” versus “Change the bank” When it comes down to it, focusing on risk-adjusted return on capital and overall stability both internally and externally-facing is the bank’s top priority. Making significant changes to proven processes and models simply never gets the same attention as maintaining them. Similarly, issues like customer-centric user interface and cutting-edge technological advances are often simply beyond a bank’s expertise and can prove difficult to assign to a knowledgeable in-house expert to drive. It is not that the bank actively rejects any potential benefits – they simply must grapple with manpower and bandwidth, and innovation is rarely the winner.
It bears repeating: none of the considerations above represents an irrational or irresponsible approach, necessarily. No one is losing their job by focusing on the key mission of the bank of providing safe, dependable, and consistent shareholder value.
However, like all businesses, banks cannot ignore the reality that they must stay ahead of — or even maintain parity with — the competition. Challenger institutions, which may be more forward-thinking banks who are eagerly and rapidly innovating, or brand-new institutions offering alternative lending solutions such as BNPL, have made deep inroads through a better understanding of customer needs. Failing to embrace opportunities that can increase sales, decrease risk, expand market share, and scale rapidly, can be a true Achilles’ heel.
In short, banks need to figure out how to embrace and benefit from the fresh thinking, customer-centric mindset and cutting-edge technological advances that FinTech's bring to the mix. An energetic ‘can-do’ attitude combined with the loyal customer base of traditional banks can deliver excellent results for both parties.
So how’s it done?
While there’s no “one-size-fits-all” approach (every bank and every Fintech partner is different), the following are several tips to consider once a bank recognises that it has much to gain in advancing its innovation efforts through a fintech partner:
● Create buy-in of the platform’s benefit ... and cost. No fintech project is going to progress smoothly if individuals (or whole departments) enter into the relationship, resistant to change, unconvinced of the benefits, or concerned about the extra workload. Before signing any agreement, the fintech partner must patiently and thoroughly present its solution – with all its business, compliance, and technical implications — to the bank departments that will be impacted by the work, focusing on the elements most important to them. Yes, this involves a significant number of hours and plenty of repetition, but this groundwork is perhaps the most critical element to achieve success. In many of the larger banks there are groups dedicated to the success of Fintech partnerships with small budget pools suitable for a proof of concept approach as described in the next point.
● Create a proof of concept in a sandbox. Reduce risk by having the partner create either a partial implementation or a full implementation that is only offered to very select customers – often “friends and family” of bank employees. This approach limits the impact of problematic or unexpected results because it involves only a limited number of friendly participants. It also provides richer feedback, both positive and negative, along the way.
● Escrow the code. While this assurance is undoubtedly only designed for a worst-case scenario. Having a third party secure the software code means the bank can deploy its own resources to another team, — or even possibly employees of the startup that no longer exists — return to continue the project. In addition to the actual code, you should also document all processes, logic, data, infrastructure schematics, and designs so that they can be used to develop or sustain the implementation, should you so decide.
● Keep most tech changes on the fintech partner side — while this may seem counterintuitive when discussing a fintech partner without guaranteed longevity, it means that should an implementation have to be terminated and removed for any reason, there is minimal “recovery work” required for your own systems and infrastructure. It also allows testing and QA to occur with minimal impact on your systems. This arrangement works best when the partner offers an embedded banking solution, where the technology remains on their side of the fence, providing services through bi-directional APIs, rather than fundamentally changing your own systems.
Wait, there’s one more thing…
Choosing a partner with experience dramatically enhances each of the strategies above. There is nothing wrong with partnering with a young start-up if its leaders are experienced in the domain and have demonstrated successful proofs of concept that can give you peace of mind.
At ezbob, we actually do one better: we come from the lending side of the business. We created our digital lending platform to help banks do precisely what we needed to do ourselves. Unlike others in the space, our platform is not reliant on exploring new scenarios or relying on debatable assumptions.
Using an end-to-end approach, we incorporate each stage, from onboarding to our powerful risk engine, credit models, and highly intuitive UI. And it all happens using off-the-shelf components that can be plugged in or removed, as needed, on a case-by-case basis. This means that ezbob clients not only receive a comprehensive, customisable, AI digital lending platform solution out of the box, but also get it quickly for rapid time to market.
We provide the technology, the AI risk assessment infrastructure, and the top-notch user experience. This happens on our end, embedded neatly in the bank’s digital offerings. The bank maintains full control to customise, add/remove rules, conduct tests, and to strategise on policy. The risk and compliance teams in the bank y are being empowered to do more, and do it more effectively, driving the business without substantial IT involvement. Naturally, to provide full transparency on what’s happening on our platform, clients also receive a full audit trail.
Summing up
Yes, a bank’s hesitation to engage with a small fintech company is indeed well-founded and hard to argue with. But hesitation can turn either into short-sighted outright rejection, or a careful analysis and cautious advance into tomorrow’s inevitable bank evolution. With the right strategy, it’s easier than ever to find a fintech solution that global banks can trust.
Want to learn more on our embedded lending solution, head to our platform page.
