Bankers have increasingly come to accept that they need to work with fintechs — most financial institutions can't build technology as quickly and creatively as a startup can, with top developer talent, agile methods and quick execution.
Fintechs, in turn, have grown to understand they need banks for the capital, scale, data and regulatory support.
But both sides are also finding out that like in any relationship, these alliances require compromise and adaptability. At American Banker’s Retail Banking 2017 conference in Miami last week, bankers spoke candidly about the ups and downs that partnering with a young tech firm entails.
One common source of tension is that fintechs tend to be far poorer than banks.
"For fintechs and startups, speed is king, they go through cash quickly," said Peter Poon, director of channel strategy and head of digital innovation at BMO Financial Group. "Banks have to respect that for startups, time is of the essence.”
It can be hard for a bank to match the speed and agility of a fintech partner. “Bankers traditionally are taught and trained to avoid risk,” Poon said. “We need to share that mindset and think about how we manage risk and actively embrace it when the opportunity comes.”
But for their part, fintechs have to understand the regulatory burden with which banks struggle.
“Startups have to adjust and remember that there's a tremendous level of scrutiny and robustness that the banks go through in all their exercises,” Poon said. “There's a happy medium."
Another sticking point is screen scraping. For many fintechs, especially small companies, having an aggregator screen-scrape customers’ data from their bank accounts is the easiest and sometimes only option for working with that data.
But for many banks this is anathema. "People sharing their credentials with third and fourth parties is not a great situation for the consumer, it's not a great situation for the bank, and it's not a great solution for data privacy and control," said Andres Wolberg-Stok, global head of policy at Citi FinTech.
This is why Citigroup has been a proponent of open application programming interfaces.
“One of the major benefits of opening up APIs is you can then say, ‘Here’s a proper front door,’ ” Wolberg-Stok said. “You can use various forms of authentication … where consumers no longer need to give up their user name and password to a third party and aggregators no longer impersonate customers.”
Another hurdle is striking a balance between growth and regulation. For example: Revenues have grown fivefold in the last year at Chime, a mobile banking fintech with several hundred thousand customers. This has been a mixed blessing for its partner institution, The Bancorp.
“They have phenomenal customer service ratings that are unheard-of in the industry,” AnaLiza Grandner, senior vice president, account executive and private-label banking manager at The Bancorp, said of Chime. “Being able to foster that continued growth and creation of new programs within the regulatory framework can be a challenge, particularly if you're looking at programs that offer a hot-button program like overdraft.” A regulatory sandbox within which to create such programs would be ideal, she said.
And investing in fintech startups, as BBVA originally tried to do through a venture capital subsidiary, is a tough road, said Jay Reinemann, co-founder of Propel, the stand-alone venture capital fund BBVA spun off but remains the primary investor in.
"The Fed doesn't like banks investing in fintech startups," Reinemann said. "While all the other real investors out there don't have to live with regulators — maybe the SEC if you're really large — the Bank Holding Company Act causes all kinds of unnatural acts as an investor. There's this 5% limitation [on stakes in other entities] that makes it really tough to make profitable, good investments.”
To get around that and the Volcker Rule’s restrictions on bank equity investments, BBVA ended up getting a Small Business Investment Company license from the Small Business Administration, Reinemann said.
Propel was spun out of BBVA last year. "Just to have a more nimble, independent organization we're putting our money in, aligning ourselves with the other investors, makes a world of difference in our business," Reinemann said. "Corporate culture, as well-intended as it is, sometimes makes it tough to get something done."
All that said, bankers at last week’s conference said they want to partner with fintechs even more.
"This year we want to double down on what we call 'open banking,' which is to open up APIs," said Wolberg-Stok. "We want to allow fintech startups to interact with Citi without having to go to through an aggregator. The whole open banking thing is central to our concept of ‘fintegration.’ "
In addition to Chime, The Bancorp supports a host of fintechs as well as household names Uber and T-Mobile. The bank will be launching new programs and several new partnerships in the next year, according to Grandner.
"There are tremendous advantages to partnering with fintech companies," Grandner said. "They all have a very unique opportunity to fix something they see as wrong with the financial services industry, whether it's fees, real-time money movement, or something else. So being able to incorporate with our existing infrastructure on the compliance and anti-money-laundering front and being able to give them the ability to offer whatever they want to the consumer base while maintaining strong regulatory controls in the background, I think makes for an ideal marriage."
Bank of Montreal also is stepping up its work with fintechs.
"We always admire how fintechs have that singular customer focus and they put that focus to solve an industry problem," Poon said. "Their mindset starts with ‘customer first,’ they can think about the legacy constraints after. From a legacy perspective, they can be a shock to the system for a larger bank."