Founder and CEO of Wildfire Systems.
Partnerships between fintechs and financial institutions (FIs) can be mutually beneficial. As account holders’ expectations change and speed-to-market becomes essential to compete and to meet customers’ needs, many financial institutions partner with fintechs to add in-demand features and products because they can move fast.
Four Key Questions To Ask
Having established multiple bank partnerships, from my perspective, these are the critical questions FIs should ask as they explore partnerships:
1. Does the fintech recognize the importance of strong risk management and compliance?
Financial service organizations need to know their tech partners’ security and privacy policies, their protections and willingness to comply with banking regulations and their capability to properly handle and protect any sensitive customer data. A responsible fintech company recognizes the inherent risks and proactively works to bring the organization into compliance with the security standards and consumer privacy protections FIs require.
A fintech should demonstrate its commitment to securely and accurately provide service by establishing the appropriate security certifications, such as SOC 2 and PCI-DSS. In fact, banks may require these certifications before even considering a partnership.
Finally, the fintech should be able to provide guidance to the bank on how to properly modify any terms of service or EULA. They should be able to guide the FI appropriately on whether modifications are needed as a result of the fintech’s technology. For example, if banking data is being shared with the fintech, consumers need to be told how, when and why. The FI’s terms of service must be updated accordingly.
2. What are its background and roadmap?
FIs should also do their fiscal due diligence by asking the following:
• What’s the fintech’s financial situation—will it be viable in the long term?
• Is the commitment to innovation ongoing?
• Is it backed by dedicated research and development funds, time and staff?
Financial institutions should also know whether their venture team (if one exists) considers the prospective fintech partner a viable investment partner. If not, why? If the venture team thinks the business is fragile or not well run, it could be a good warning signal, especially if it provides a mission-critical offering.
Also, how long has the fintech been in business? The fintech industry is one of the fastest-growing industries today. However, many fail due to immense competition and difficulty getting traction. In fact, according to the results of a study by the Wall Street Journal, 75% of fintech startups fail when they’re backed by venture capital.
Finally, keeping regulatory compliance in mind due to the heavily regulated nature of the financial services industry, it’s important to establish whether the prospective partner is compliance-minded and agile, especially as new guidelines continue to be issued. Is there a reliable historical pattern by the partner of being on the “right side of compliance?”
3. Are they open to data sharing?
FIs can streamline processes if they work with fintechs that incorporate open banking, which allows traditional FIs to share data via application programming interfaces (APIs). Open banking also facilitates embedded finance—the integration of financial services such as lending or payment processing into their apps and ecosystems—which can grow consumer engagement.
Many FIs expand services via a strong partnership with fintechs for analytics, personalization, funds transfers and more. Ultimately, you want a fintech that can deliver a frictionless solution for the end consumer.
4. What are they like as people?
During the vetting process, an FI should also determine if the fintech team would make a good partner, not just a tech supplier. This is especially important in cases in which the FI is embedding technology or leveraging user-facing services from the fintech. Such partnerships can only flourish when interests are aligned and the FI views (and treats) the fintech as a partner, not just a vendor. This requires a level of collaboration and mutual respect transcending the typical client-vendor approach that was more common in the past.
In today’s age of remote working and infrequent in-person meetings, it’s particularly important for both sides to establish fluid working relationships and smooth coordination. Relationship building is priceless for both parties; often, this hinges on good chemistry. It’s important to lay ground rules at the start, like:
• What are the expectations of the teams on how they’ll communicate?
• Which tools will be used for project management?
• What are the frequency and format of regular standing meetings?
Because so many teams are remote or hybrid, it’s important to take extra steps to harmonize teams and workflows.
Collaboration Is Evolving
Collaboration between financial institutions and fintechs is evolving. As financial institutions increasingly collaborate with fintech partners, it’s essential to determine if a fintech alliance can support digital growth. That means finding the most compatible partner by seeking the right technological and organizational attributes from the beginning.