THE BUSINESS RATIONALE AND TIMING ARE COMPELLING
Banks, credit unions and Fintechs are facing unprecedented challenges and opportunities in the wake of the COVID-19 pandemic. Some online lenders are failing while other Fintechs and bank-Fintech partnerships are booming. Although the future is uncertain, digital services and data/AI will surely play increasingly critical roles in banking, wealth management, and insurance. Physical channels including branches, ATMs, and even cash will be transformed.
COVID-19 has increased the use of digital financial services by millions of retail and business customers almost overnight. While agile players have captured new customers and increased revenues (e.g., Chime, PayPal, Eastern Bank) others have had to turn away potential PPP borrowers and some Fintechs have been forced to make hard decisions, such as laying off 460 staff (Lending Club).
Now, when Fintech funding is at its lowest since 2016, interest rates are near zero, and bank profits are under pressure – API integrations, marketing & distribution agreements, partnerships, mergers and acquisitions are more compelling than ever between Fintechs and banks.
This is no time for “business as usual.” Banks that are waiting for core vendors and internal IT to develop innovative services risk being left behind. Fintechs seeking rapid, profitable growth must decide whether banks are competitors, customers, or product/channel partners.
Strategic bank-Fintech partnerships can:
- Accelerate time to market
- Open new markets
- Enhance customer experience
- Lower customer acquisition costs
- Optimize partner balance sheets
- Increase staff productivity
- Leverage bank regulatory expertise and FDIC insurance
- Reduce credit and fraud losses
Tearsheet authored an excellent study in April of this year (https://tearsheet.co/funding/the- tearsheet-2020-guide-to-bank-Fintech-partnerships/), examining 100 recent bank-Fintech partnerships. Their key drivers for these partnerships further support our findings:
- Consumer demand for better technology and higher expectations of their banks and financial service providers
- Traditional financial institutions’ growing openness to collaboration with the
- Banks creating innovation programs to better harness ideas and tech from startups
- B2C Fintech firms pivoting to B2B
Winning 2020 partnerships that Tearsheet featured include Sutton Bank and Marqueta (Overall Winner), Mastercard, and Signzy (Best Customer Journey), Midwest BankCentre and MANTL (Digital Transformation Winner), and KeyBank and AvidXchange(CFO Choice Award.
Fintech bank partnerships focused on B2B is worth emphasizing. Merchants expect consumer-like ease of use and access to services from their banking relationships, especially during these days of working remotely. Fintechs can help banks enhance merchant services via relevant payments infrastructure depending on merchant need, enhanced data capabilities for KYC and AML, and providing better tools for FP&A.
Another important rationale for partnership is that Fintech/online lending companies are increasingly providing crucial services to many of customers, particularly those with non- prime credit scores by traditional metrics who have been underserved by traditional financial institutions, according to Mary Jackson1, CEO of the Online Lenders Alliance. Due to the impact of COVID, these crucial services will see heightened interest and usage.
Jackson further notes that as banks partner with Fintech companies, they enable people with non-prime credit scores to access a variety of highly regulated financial products that did not exist even a few years ago. According to TransUnion’s Q4 2018 Industry Insights Report, loans offered by Fintech companies comprised 38% of all unsecured personal loan balances, accounting for more than $52 billion in consumer lending. That’s up significantly from 5% of balances from Fintech companies in 2013.
That’s not to say the path will be easy. According to The World Fintech Report 2020 there are several blockers to effective Fintech-bank partnerships:
- Only 21% of banks say their systems are agile enough for collaboration
- Only 6% of banks have achieved the desired ROI from collaboration
- 70% of Fintechs don’t culturally or organizationally see eye-to-eye with their bank partner
- More than 70% of Fintechs say they are frustrated with the incumbent’s process
- Half of Fintech executives say they have not found the right collaborative partner
There’s going to be a shake-out in the fintech space as some players are unable to effectively partner and others merge/get acquired. Due diligence will dictate who will effectively address the aforementioned issues and who will be successful combining the stability of banking incumbents with the innovation offered by Fintechs.
No one knows how rapidly the U.S economy will recover as businesses begin to reopen. However, over the next 12 months you can anticipate significant changes in customer behavior as consumers and businesses reassess their financial strength, needs and provider relationships.