Fintech collaborations are an increasingly critical component of a bank’s strategy.
So much so that Bank Director launched FinXTech, committed to bridging the gap between financial institutions and financial technology companies. Identifying and establishing the right partner enables banks to remain competitive among peers and non-bank competitors by allowing them to access modern and scalable solutions. With over 10,000 fintechs operating in the U.S. alone, finding and vetting the right solution can seem like an arduous task for banks.
The most successful partnerships are prioritized at the board and executive level. Ideally, each partnership has an owner — one that is senior enough to make decisions that dictate the direction of the partnership. With prioritization and owners in place, banks can consider fintech companies at all stages of maturity as potential partners. While early-stage companies inherently carry more risk, the trade-off often comes in the form of enhanced customization or pricing discounts. These earlier-stage partnerships may require the bank to be more involved during the implementation, compliance or regulatory processes, compared to working with a more-mature company.
There is no one-size-fits-all approach, and it’s important for banks to evaluate potential partners based on their own strategic plan and risk tolerance. When conducting diligence on fintechs of any stage or category, banks should place emphasis on the following aspects of a potential partner:
1. Analyze Business Health. This starts with understanding the fintech’s ability to scale while remaining in viable financial conditions. Banks should evaluate financial statements, internal key performance indicator reports, and information on sources of funding, including major investors.
Banks should also research the company’s competitive environment, strength of its client base and potential expansion plans. This information can help determine the fintech’s capability to sustain operations and satisfy any financial commitments, allowing for a long-term, prosperous partnership. This analysis is even more important in the current economic environment, where fresh capital may be harder to come by.
2. Determine Legal and Compliance. Banks need to assess a fintech’s compliance policies to determine if their partner will be able to comply with the bank’s own legal and regulatory standards. Executives should include quarterly and annual reports, litigation or enforcement action records, and other relevant public materials, such as patents or licenses, in this evaluation.
Banks may also want to consider reviewing the fintech’s relationship with other financial institutions, as well as the firm’s risk management controls and regulatory compliance processes in areas relevant to the operations. This can give bank executives greater insight into the fintech’s familiarity with the regulatory environment and ability to comply with important laws and regulations.
3. Evaluate Data Security. Banks must understand a fintech’s information and security framework and procedures, including how the company plans to leverage customer or other potentially sensitive, proprietary information.
Executives should review the fintech’s policies and procedures, information security control assessments, incident management and response policies, and information security and privacy awareness training materials. In addition, external reports, such as SOC 2 audits, can be key documents to aid in the assessment. This due diligence can help banks understand the fintech’s approach to data security, while upholding the regulator’s expectations.
4. Ask for References. When considering a potential fintech partnership, executives should consult with multiple references. References can provide the bank with insight into the company’s history, conflict resolution, strengths and weakness, renewal plans and more, allowing for a deeper understanding of the fintech’s past and current relationships. If possible, choose the reference you speak with, rather than allowing the fintech to choose.
5. Ensure Cultural Alignment. The fintech’s culture plays an important role in a partnership, which is why on-site visits to see the operations and team in action can help executives with their assessment. Have conversations with the founders about their goals and speak with other members of the team to get a better idea of who you will be working with. Partners should be confident in the people and technology — both will create a mutually successful and meaningful relationship.
Despite the best intentions, not all partnerships are successful. Common mistakes include lack of ownership and strategy, project fatigue, risk aversion and unreasonable expectations. Too often, banks are looking for a silver bullet, but meaningful outcomes take time. Setting expectations and continuing to re-evaluate the success and performance of these partnerships frequently will ensure that both parties are achieving optimal results.
Once banks establish partnerships, they must also nurture the relationship. Again, this is best accomplished by having a dedicated partner owner who is responsible for meeting objectives. As someone who analyzes hundreds of fintechs to determine quality, viability and partner value, I am encouraged by the vast number of technology solutions available to financial institutions today. Keeping a focused, analytical approach to partnering with fintechs will put your bank well on its way to implementing innovative new technology for all stakeholders.