One is young and enthusiastic, but slightly naive. The other is older and wiser, but a bit bureaucratic. Welcome to the world of finance, where fintech and incumbent banks once duked it out as rivals, but are now forming new, fruitful relationships.
According to recent research by payments bank Banking Circle, 77% of fintechs and banks reported a rise in “correspondent banking relationships”, where, for instance, infrastructure is provided for fintechs to support their own products.
“These big banks have been around for hundreds of years, there’s a lot that fintechs could learn from them,” says Mitch Trehan, UK head of compliance at Banking Circle. “And vice versa; banks have learned a lot from these fintechs, like how to do some things faster and better.”
But it hasn’t all been roses. Since the 2008 financial crisis, banks have become increasingly risk averse, causing many fresh relationships to see cracks or even end.
We spoke to experts about fintech relationships and the kinks that still need ironing out.
Fintechs: Fish or friend?
Originally, fintechs entered the scene with the hopes of taking over a whole section of clients, says Trehan, and planned to use banks’ data and services to run their new, digital-first products. But that, he says, quickly changed when fintechs realised they couldn’t acquire banks’ clients without a fight.
Banks... they’re big, they’re strong, capital-wise and client-wise, but what they lack is being nimble
Kate Pohl, head of banking and corporate sales at fintech Traxpay, which has eight official partners, says banks have also realised what they can gain. In other words, if banks are sharks and fintechs are fish, fintechs have gone from banks’ prey to their friends.
“Banks, of course, they’re big, they’re strong, capital-wise and client-wise, but what they lack is being nimble,” she says. “Banks are far more open today than they have ever been, I think they understand that collaboration enriches them, as opposed to damaging them.”
Søren Nielsen, chief operating officer of fintech Subaio, a startup aligned with nine traditional banks, says while it’s not all smooth sailing, the culture war has eased.
“I would be lying if I said that it was smooth to partner with big banks — that’s part of the game,” he says. “But the way that fintechs and banks see each other today is much more as partners and less as threats.”
To risk or not to risk
But the biggest issue for fintechs isn’t being eaten for breakfast by a bank, it’s de-risking, where banks decide that certain activities and certain things — such as startup partnerships — are outside their comfort zone.
“Fintech firms, if they get fined for something, it would be less as they are typically smaller. Whereas when you look at these massive banks, they’ve got everything to lose,” says Trehan. “If they take a big risk, and it goes wrong, you’ve got a larger impact to society and reputational damage, you’ve got the media, you’ve got politicians, shareholders...”
Nielsen adds that obstacles in fintech-banking relationships are still connected to speed and culture. This risk aversion may slow things down even further.
Fintech firms, if they get fined for something, it would be less as they are typically smaller. Whereas when you look at these massive banks, they’ve got everything to lose
“In the fintech space, we’re used to failing fast, we’re used to trying different things, we’re used to having a high level of risk because that means we can fail fast and we can move on to what really works,” he says. “When you work with traditional banks, they are very risk averse. That’s also why it takes time.”
Banking Circle found many smaller banks and non-bank financial institutions (like fintechs and startups) are at risk of being de-risked, often without notice, and disproportionately in southern Europe.
“Southern Europe’s more likely to have fallen victim to de-risking,” Trehan says. “The main reason that banks were giving for ending relationships in southern Europe is because they were saying we’re got this risk eligibility criteria and you just no longer meet our requirements and we’re no longer going to bank you.”
The flip side of de-risking
Because of the potential of fintech partnerships crumbling faster than you can say “open banking”, Banking Circle found two in three fintechs felt like they had too many partnerships (which all cost money), in order to compensate for partnerships they might lose.
“Looking at it from the fintechs’ perspective, most of them felt that they had too many correspondent banking relationships today and the only reason for that was based out of fear,” says Trehan. “They have more because they are worried about a bank de-risking them with limited notice.”
There is no quick fix, but in order to maintain fewer but stronger partnerships, Trehan says communication is key.
“There’s more clarity needed about what each party really wants and keeping that communication going,” he says. “There was a fear of going after the same clients and fear of how to talk to each other, but I don’t think these are necessarily roadblocks; they’re more like slight potholes in the journey.”
Fintechs need to internalise that a bigger bank, however appealing, also comes hand-in-hand with greater organisational complexity and bigger decision-making trees
Pohl adds that it’s essential fintechs and banks understand each other’s roles and processes. For instance, fintechs can be confused at how long some actions can take banks because they don’t understand the red tape that needs to be pushed through.
“I’m one of those people that speaks to both fintech and banks. You have to understand both sides because I’ve heard a lot of conversations where I’m absolutely sure both sides did not understand each other,” she says. “I would say some of the biggest banks in the world could probably take over the world, but it’s not going to happen because it’s very hard to break their internal siloes down.”
QED Investors managing partner Nigel Morris, who wrote a white paper about the best practices in bank-fintech relationships, says trust is also needed in these situations.
“Mutual trust is an essential requirement for partnerships to be successful,” he says. “So this has to be top of mind particularly when tasks around compliance and contracting take longer than they are ordinarily accustomed to.
“Fintechs need to internalise that a bigger bank with a bigger customer base, however appealing, also comes hand-in-hand with greater organisational complexity and bigger decision-making trees.”
A need for speed
Of course, not all fintechs are made equal — and they should therefore be aware of their value add. The white paper splits the startups into direct competitors and adjacent competitors of banks.
Morris says adjacent competitors “are doing things that banks could have done but either actively chose not to or haven’t had the time, resources or talent to do”, and could therefore be the most valuable to banks in the future.
Challenger banks — which are banks that have been made as their own entities, are venture funded and out to take a piece of the market — make good partners if you’re after speed
“The enablers should really be a bank’s best friend because the fintechs’ data and analytics offerings, marketing support and tech chops would all be hugely beneficial in supercharging what could be an otherwise stale business,” he says.
Nielsen, on the other hand, says challenger banks — which are banks that have been made as their own entities, are venture funded and out to take a piece of the market — make good partners if you’re after speed.
“One of the reasons why we’re partnering both with challenger banks and also with traditional banks is that with challenger banks they work faster,” he says. “With [neobank] Lunar it took a hackathon over a weekend to be able to launch to market whereas with some of the traditional banks, it takes about three months to be ready to launch to market.”
Download Banking Circle’s whitepaper on de-risking here: Big Bank De-risking: The invisible threat to financial inclusion