Partnerships with startup fintech companies can be fraught with difficulties. There are the cultural differences between bankers and tech entrepreneurs, the latter sometimes showing up for business meetings in sandals and jeans. Or there are the more practical problems of risk management with a startup that may not have been in business for more than a year or two.
Still, many banks are very much interested in doing business with fintech companies, in part because they fear innovation will lure customers away from the banking industry, or to more technologically savvy competitors. In a recent PwC survey of some 1,308 financial services executives, including banks, asset managers and insurance companies, 80 percent believe their profits are at risk from innovators, and 82 percent expect to increase their partnerships with fintech companies in the next three to five years.
Of course, banks have relied for a long time on financial technology companies in the form of core processors who provide everything from online banking to transaction services. But the sheer number of new financial technology firms has dwarfed the core processors and is quickly changing the landscape for financial services. Globally, some 6,500 fintech companies have received about $100 billion in funding in the last several years, according CB Insights, a research firm that tracks startup investments.
“[Fintech companies] have the innovation, the great user experience and the efficiency the bank doesn’t have,” says Jo Ann Barefoot, a former deputy comptroller of the currency, who is now an advisor and CEO of Barefoot Innovation Group. She is a speaker at the FinXTech Annual Summit Wednesday in New York City, an event for bank executives, fintech companies and venture capitalists. “The banks are hard pressed to build it in-house unless it’s a really big bank, and even the big banks have trouble doing it.”
So what are some tips for banks interested in partnering with fintech companies?
Go Straight to the Investors
There are so many fintech companies out there, it’s hard to get a handle on what the best offerings may be for your bank. Manoj Govindan, a senior vice president in the Office of Innovation and Advanced Tech/Partnerships for Wells Fargo & Co., says the bank reduces the cycle time by building relationships with venture capital firms and angel investors who put their money into fintech companies. That helps the investors know what the bank is looking for and problems it needs to solve. It also helps the bank learn about solutions. Their conversations are “not about shiny objects,” he said. “It’s very focused on the three, or four or five things we know we need to solve for. It’s about educating the venture capitalists [and] that vastly reduces the feedback loop.”
Think Beyond Build or Buy
Govindan also urges banks to think beyond the notion that the bank can either build the technology solution or buy it. APIs, or application programming interfaces, are a great way for innovators to tap into the bank’s customer base and provide what customers need, he says. Wells Fargo and JPMorgan Chase & Co. recently inked a deal with Intuit to develop APIs so the bank’s customers can use Intuit’s products, including Mint and Quicken, in a way the bank can control and secure.
Accept Cultural Differences
One important first step to partnering with fintech companies is to recognize cultural differences. PayPal CEO Dan Schulman, for example, wears sandals or cowboy boots to business meetings. “Banks should recognize that there is a casual culture that is not slacker, or lax or disrespectful,’’ Barefoot says. You need to be open to how young some of these entrepreneurs are, and how great the technology can be, she adds.
Adjust the Vendor Risk Management Process
Traditional aspects of vendor risk management go by the wayside in dealing with fintech companies that haven’t been around for more than a year or two and may not have a source of funding beyond another few years. The $1 billion asset Radius Bank, based in Boston, does physical inspections of vendor sites, interviews the vendors in terms of compliance and risk management and sets up a wall, at least in the early part of the partnership, so that vendors don’t have access to customer data. The bank also has early conversations with regulators to make sure they are comfortable with the partnership and the risk management process, according to president and CEO Mike Butler in this video interview. Barefoot says banks must do serious vetting of fintech companies, especially on cybersecurity and anti-money laundering compliance. Some vendors sell customer data to third parties, so be clear about whether the fintech's goals and policies match the bank's. "Most of them are trying to do something good for the customer,'' Barefoot says. "But you can't take that for granted."