Corporate banks are notoriously risk averse. As the old saying goes, nobody has ever lost their job for doing things the conventional way. However, those conventions are rapidly changing. Driven by best-in-class digital experiences, commercial banking clients have come to expect fast, frictionless transactions from every company they do business with… including their bank. When it comes to delivering those services, industry leading institutions like JP Morgan Chase know that partnering with the right fintech can be a cost effective and low risk way to develop truly innovative new services.
To be frank, there is no shortage of interesting fintech businesses offering a variety of niche services with varying degrees of long term value. According to Deloitte, payments is one of the most disruptive and dynamic banking opportunities in-sector1. Legacy systems plagued with slow, manual and friction-filled interactions are ripe for disruption. Fintechs like FISPAN are working hard to reimagine the payments landscape and introduce the potential of truly contextual banking experiences to their customers at scale.
Fintechs frequently join forces with financial institutions to strategically scale products and services. While these partnerships are pragmatic and productive, they are not without potential problems. There are regulatory considerations, viability concerns, technical limitations and more. However, pointing out potential issues is easy, what is far more interesting is planning for a successful long term partnership.
To help determine if a fintech is the right fit for your bank consider these three key facets:
Strong relationships with regulators.
Innovation in financial services has accelerated rapidly in recent years. In many cases regulators are lagging behind the leaders which creates uncertainty about the breadth and depth of future rules. What is absolutely certain is that fintechs must follow federal and state laws; regardless of when they are drafted. It is important to understand how your fintech partners plan to manage future regulatory obstacles. That starts with ensuring your partner is in good standing with appropriate regulators. Here are some additional important questions to consider:
- How do they track and follow the rules and what are the steps they will take to make changes as the rules evolve?
- Which regulations currently apply to their products and services?
- What license or certificates are they required to have and do they have them?
Managing compliance is a two-way street. Banks are obligated to develop a vendor management program with oversight over fintech partners. It is wise to have an expert in-house or nominate a senior member of your team to build a relationship with regulatory bodies.
Robust data-privacy and security practices and response plans
Fraud is on the rise and while bank cheques are still the most popular method for business-to-business payments in the US, they have declined from 81% in 2004 to 42% in 20192. Sadly, fraudsters are innovative and intrepid. As more and more banks transition to digital payment systems it is reasonable to expect a proportional increase in fraud. With that in mind it is important to know if your partner has a fraud prevention program in place. Do they have the ability to recognize customers at a greater risk of being defrauded? What is the impact of their programs on the overall customer experience? Does it impact speed? Is it too onerous? Moreover, prevention is only one part of the puzzle. A clear understanding of how they will respond to a breach is equally important.
Reputation, resilience and viability
Dynamic, agile and exciting start-ups have had a significant impact on the financial services sector. However, just because the business is new, it's important to ensure the leadership has deep experience in both the financial space and SAAS. Before you agree to a partnership try to determine:
- The reputation of their executives
- Their standing in the commercial banking industry
- Their governance model or BOD
- A 3-5-10 year plan for revenue and funding
- Their immediate competition and unique capabilities
When it comes to driving innovation, commercial banks have extensive resources and the steadily increasing support of their senior management teams. Since the industry is awash with new start-ups vying for the banks' business, banks should be sure to perform thorough diligence. While the procurement process, legal and security will cover most of the basics in the later stages of the on-boarding process, ensuring a potential partner displays the three key facets described above will not only accelerate the process but pay dividends in the long run.
Would you like to learn more about this topic? Check out our blog post, Banking on Fintechs.