Bank-Fintech Partnership Models
Fintech companies are driving the development of new business models in the financial sector through platforms and ecosystems. They are known for their disruptive potential, often challenging conventional banking models by offering more accessible, convenient, and tech-savvy financial solutions. Banks are still more strictly regulated and face barriers to innovation, whereas Fintechs operating in the B2B sector are typically highly agile technology players that operate outside of the regulated domain. Bank fintech partnerships represent collaborations between these two spheres, where traditional banks harness fintech innovation to enhance their services and remain competitive in a rapidly evolving industry.
Coming together means that banks don’t have to spend millions on building their tech stacks from the ground up. They gain access to new-age underwriting models, smooth workflows, and APIs without having to do any of the leg work. Fintechs, on the other hand, benefit from banks’ already solid captive customer base and the consumer confidence they’ve built over decades.
Digital Transformation fueling these partnerships
Global retail banking has seen a vast change in last 10 years when it comes to incorporating technology in their systems. The macro factors are changing very rapidly, in such a fast-moving market, Digital transformation becomes utmost necessity for banks. Banks understand that incorporating tech with business is very important to streamline their operations and stay ahead in this competitive market. Finastra report suggests that only one in five CTOs consider them ahead of digitalization curve while 54% consider them behind in this digitization race.
This race for digitization has created a necessity of partnership with fintech players. Most banks have already started to connect with modern fintech players to integrate their tech solutions in their core stack. 75% of global banks are looking to partner with average of 3 fintech players to achieve their goals for digital transformation. Following graph shows how most of the CTOs consider either plans to partner and integrate third party fintech solutions or buy and integrate these solutions.
How Fintech partnerships helps Banks?
Innovation and Agility: Partnering with fintech firms allows banks to tap into this innovation without building these capabilities in-house.
Improved user experience: Banks can leverage fintech solutions to provide customers with user-friendly services, improving overall satisfaction.
Cost Efficiency: Automation and digitalization offered by fintech partners can lead to significant savings and reduce operational costs.
New Markets: Partnering with fintechs allows banks to access untapped customer segments which Fintech firms target.
Compliance & security: Banks can benefit from Fintech’s expertise navigating the complex regulatory landscape while ensuring robust data security.
Competitive edge: Fintech partnerships can give banks a competitive edge by offering cutting-edge solutions and staying relevant in an increasingly digital world.
Diversification: Collaborating with fintech firms allows banks to diversify their service offerings which in turn helps in expanding revenue streams
Scalability: Fintech solutions are often designed with scalability in mind. Banks can scale up their services rapidly with the help of fintechs.
Bank-Fintech Partnership Models
Referral Partnership: This model involves banks referring their customers to fintech partners for specific services, such as investment advice or lending. It allows banks to provide comprehensive financial solutions without the need to build expertise in every area.
Assisted Private-Label Partnerships: In this collaboration, banks and fintech firms jointly offer customized financial products or services under a co-branded umbrella. This strengthens the bank’s product portfolio while capitalizing on the fintech’s technological capabilities. Both bank and fintech partner bear responsibility and control over the customer experience.
Private-Label Partnerships: Private-label partnerships enable banks to white-label fintech solutions, presenting them as their own offerings. This allows banks to rapidly deploy fintech-powered products while maintaining their brand identity. Bank purchases the fintech solution, customizes it, and sells it to customers. Customers will most probably never see the fintech company’s name anywhere on the product.
Small Business Loans: This partnership model focuses on providing fintech-backed small business loans. Banks leverage fintech platforms to streamline loan origination, approval, and disbursement, supporting entrepreneurship and economic growth. Fintechs can leverage the lending ability of a traditional bank where they otherwise might find it difficult to get financing from traditional lenders.
Debit Cards: Collaboration in debit card services enables banks to offer customers enhanced payment experiences, including features like digital wallets and instant notifications.
Building in-house vs outsourcing to Fintech Partners
Following image shows the seven criteria on which banks should decide whether they should build in house or go for a fintech partnership to achieve their digitization goals:
What characteristics Banks look into fintechs before partnering with?
Banks have quite ambitious plans when it comes to digital transformation. To achieve these ambitions, it becomes really important to partner with the right fintech player which not only suits your needs but also culturally compatible with your organization. Right partner will maintain an ecosystem of third party, ready-made apps and services that can be easily integrated with core tech stack. A right partner will not only build best in class solutions but the kind of solutions which are compatible with core systems.
Following chart shows fintech capability preferences of CTOs and business leaders while choosing a right partner.
Chart clearly shows that while for CTOs being able to produce real time data is top choice, for business leaders it is the ability to deliver online portals and banking channels.
Key factors Fintechs should look for before partnering with banks
Build technical connections with a focus on agility: Fintechs need to be confident in their solution vision and leverage new technology to introduce greater agility and flexibility to existing process.
Tie-up with banks with innovative mindset: Collaborations with banks that have the willingness as well as the key capabilities to partner at scale and industrialize innovation are most likely to succeed.
Ensure cultural compatibility: Fintechs have a high-risk appetite and a need for speed, they need to ensure that they are joining forces with banks that have a risk-taking culture which will be fundamental to spur innovation.
Bank-fintech Partnerships
Indian Context
As Indian fintech ecosystem is rapidly increasing with things open APIs, India stack and UPI, there are many Indian banks which are partnering with fintechs in one or other ways to leverage their modern technology and niche audience. Some of the examples are as follows:
SBI has partnered with U-Gro, a listed MSME lending fintech platform to provide credit to MSMEs. SBI has 10–12 active fintech partnerships, scouting for 75 more fintech partner for Yono 2.0 launch.
ICICI Bank issued 4.2 million plus credit card in partnership with Amazon Pay during Q1FY24. ICICI bank announced its partnership with Niyo in 2021. Together, they are offering prepaid cards to workers of Micro, Small & Medium Enterprises (MSMEs).
HDFC Bank is partnering with fintechs to integrate with corporate ERP, offer embedded banking in corporate ecosystems journey.
Federal Bank has co-branded credit partnership with One Card under which it is targeting digitally savvy new to bank customers.
Global Context
Some of the examples of bank-fintech partnerships in global context are as follows:
Chime and Bankcorp: Chime, a neobank, partners with The Bancorp Bank to provide customers with FDIC-insured accounts and debit cards.
Square and SuttonBank: Square, a payment processing company, collaborates with Sutton Bank to offer business loans and banking services to its merchants.
Plaid and J.P. Morgan: Plaid, a fintech specializing in financial data connectivity, partnered with JPMorgan Chase to facilitate secure access to customer account data.
LendingClub and Radius Bank: LendingClub, a peer-to-peer lending platform, teamed up with Radius Bank to offer personal loans to borrowers.