Can banks and fintechs collaborate in a mutually beneficial way?

This post was originally published at The Fintech Times.

As fintech has become one of the hottest subjects in tech the sleepers have awoken, and incumbents are embracing fintech as an opportunity rather than a threat. As a result, the fintech startups are now approaching the incumbents they were once set out to disrupt as potential partners.

On the one hand, fintechs are agile and innovative. On the other, banks have consumer trust, familiar brands, large distribution networks and a well-equipped war chest. Collaboration between banks and fintechs should therefore be a win-win, improving the incumbent’s capacity for innovation and giving the fintechs scale and route to market. As a result we see weekly announces of banks collaborating with fintechs in order to boost their innovation efforts. However, there is no one size fits all recipe for bank and fintech collaboration. Fintech is not one single discipline, and neither should collaboration be treated as such.

Accelerators and incubators have proven to be a popular way for banks to engage with the fintech community where banks are hosting their own accelerator programs like Barclays techstars as well as collaborating with accelerators like Level 39 as mentors. This requires no further commitment, and can function as an early stage listening post for banks curious to take the pulse on what is going on in fintech.

Corporate venturing may for many of us take our minds back to the early 200s when everyone had to have their own corporate venture division. Fortunately, we have moved past that and banks like Commerzbank and Santander are hosting their own fintech fund, BBVA shuts down their venture fund and allocate $250 million in Propel Venture Partners. Other banks and financial institutions are also considering this as financial investors to fintech venture funds like Orange Growth capital and NFT Ventures.

For more strategic investments, acquisitions or direct investments are a more viable solution. BBVA has shown this by going on a spending spree with the acquisition of Simple and Holvi in addition to investing in challenger bank, Atom.

When it comes to non-structural collaboration, one of the common challengers are who will be facing the end customers, and who will provide middle office and back-end systems. This is where things start to get difficult. It is therefore important agree at an early stage before wasting any time in never-ending discussions. Who will maintain the customer relationship? Who will have ownership of customer data? Who will be responsible for compliance? Who will receive origination fees, who will fatten up their balance sheet? These are just some of the many questions that will arise at an early stage, and need to be treated case-by-case. For a bank like CBW Bank, it makes sense to provide the pipes and plumbing for Moven in the US, while Moven takes on the white label position in other markets. Marketplace lender, Lending Club have Webbank in Utah as a partner for issuing loans, providing a national deal flow to a mid-size regional bank, proving that there is no defined recipe for collaboration.

In order to industrialize the collaborative environment and become a digital ecosystem, the future of banking lies in open APIs and banking as a platform. In order to familiarize to this new world of open platform banking, many banks these days are probing the waters by hosting hackathons on their platforms. We are barely scratching the surface at the opportunities ahead for banking as a platform, and banks like Capital One are already willingly opening their APIs to third parties. For European banks, PSD 2 is approaching rapidly, creating a situation where banks may either stay ahead of the curve open up voluntary to create business opportunities, or the regulators will eventually drag them there kicking and screaming.

Regardless type of collaboration there need to be a common ground for a mutually beneficial business model, as well as a clearly defined roles and aligned end goals. No matter how you put it, there will be a clash of cultures when the bearded fintech entrepreneurs meet the pinstripe-wearing bankers and start challenging the established truths. Fintechs are born with a mission to change the banking industry, and incumbents are inherently resistant to change. After all, the banks have built their entire business model on reducing risk and creating predictability for several hundred years.