Banks and fintechs need each other more than ever
The coronavirus pandemic has greatly strained financial services providers and even fintechs, despite their digital prowess, have not been immune to the economic downturn.
With the exception of some of the largest providers, the vast majority of fintechs don’t have the benefit of mature customer bases to help weather the crisis.
Meanwhile, venture capital funding across all startup segments has fallen since the onset of the crisis, cutting off an important source of funds for those yet to achieve profitability. A March survey of more than 1,000 tech startups (not just fintechs) across the globe found that two-thirds didn’t have enough capital to survive past September. This financial vulnerability may have been a factor in the slew of fintech acquisitions by larger financial services providers at the beginning of this year, when coronavirus was just starting to spread around the world.
Likewise, the pandemic also exposed banks’ weaknesses. Within a matter of weeks as the coronavirus took off, banks reported spikes in deferrals and forbearances and a nosedive in profits, even at the largest financial institutions.
Most operations shifted to remote working. And amid all this, banks did their best to take advantage of new emergency lending opportunities like the government’s Paycheck Protection Program.
This last undertaking illustrated why now may be the most opportune time for banks and fintechs to address their respective weaknesses through greater collaboration. To withstand today’s turbulent conditions, fintechs need banks’ mature customer bases, and banks need fintechs’ agility.
As many banks were struggling with mechanisms to collect and process data required for PPP loan applications, dozens of fintechs were bringing solutions to market for facilitating PPP loans. Some fintechs were authorized Congress to distribute PPP loans themselves after arguing they could distribute funds more quickly than traditional banks.
Greater collaboration between banks and fintechs may be one of the most important outcomes stemming from this crisis. Some banks are already moving to establish more ties with fintechs. For example, Blend, a fintech that provides software for online mortgage applications, has reported a strong increase in banks interested in its digital platform in anticipation of such complex transactions.
But it’s also critical that banks perform their due diligence in forming these relationships. Banks don’t want to invest in a partnership that might soon end abruptly because the fintech goes under. Ensuring the fintech has sufficient capital on hand and a viable strategy for navigating the pandemic is paramount.
At the same time, banks also need to be aggressive in pursuing relationships with fintechs that meet such criteria. Achieving greater organizational agility should be paramount for banks right now — and working more with fintechs will provide that agility.
Fintechs are largely unburdened by regulations and legacy systems that hamper banks’ ability to innovate. Many have built their business on the capacity to quickly glean relevant insights from large and disparate sources of customer data — something banks have historically struggled to do.
Additionally, fintech startups tend to be laser focused on optimizing the customer experience for a single product, while banks spread their efforts over a broader set of offerings in the pursuit of serving diverse customer segments.
Additionally, regulators seem ready to give such collaborations a boost by clarifying the regulatory implications for both parties working together. The Office of the Comptroller of the Currency recently announced that it will soon propose a rule to clarify the “true lender” doctrine that for years has clouded relationships between banks and nonbanks like fintechs.
Without such clarity, state regulators have charged, fintechs are essentially renting bank charters when they purchase loans from banks, and cannot impose interest rates above state caps on those loans. Beyond resolving the doctrine’s interpretation, new acting Comptroller of the Currency Brian Brooks stated that his first priority will be providing more guidance to facilitate bank-fintech collaborations.
Though banks and fintechs have been working together for years now, many organizations on both sides are still remarkably immature in managing such collaborations. Banks should prioritize establishing mechanisms to foster more productive relationships with startups to prepare for the new normal coming out of this crisis, which is widely expected to be more digitally driven.
That must start with forming a dedicated unit for evaluating and managing potential fintech collaborations. Such units will need strong connections with every business line to gather input, understand priority use cases and business objectives, and scale startup relationships across the organization as quickly as possible.
Another consideration: Many banks may be looking to modernize their infrastructure and collaboration tools to support working more virtually. Doing so will only further serve to facilitate collaborations with startups that are likely already using similar capabilities.
As the industry’s shift to digital accelerates due to the pandemic, the assets and capabilities that startups have developed to underpin their agility will become increasingly valuable. The largest banks may well snap up fintechs struggling financially to gain exclusive access to such assets and capabilities.
But for the vast majority of banks operating with limited resources amid the pandemic, positioning themselves to quickly and fully exploit fintechs’ agility via partnerships will be one of the best actions they can take in recovering from the crisis.