Technology creates strange bedfellows.
This is particularly true for financial institutions as of late. Last year brought about some remarkable pairings between startups and banks. Consider Lending Club, the peer-to-peer lender that went public in December. Community banks are partnering with the startup to offer P2P loans directly to their customers. Meanwhile, MUFG Union Bank in San Francisco struck a deal to buy loans generated by Lending Club.
At the same time, there is something dangerously Shakespearian about partnering with your competitor. Wells Fargo has forbidden its employees from personally investing in person-to-person lenders because the companies could conflict with the bank's business.
Banks have also been teaming up with Apple on ApplePay, the service that allows customers to use an iPhone 6 to make direct payments at points of sale. The service is now available through dozens of major banks. While Apple is not necessarily a direct competitor for most banks, it could easily nibble at the edges of consumer finance.
When banks jump into bed with Apple and P2P lenders, are they fraternizing with the enemy? It depends.
Financial institutions are smart to be pragmatic about how fast the world is changing and attempt to find the right technology partners. However, they will inevitably make mistakes as they seek out new teammates. I have no doubt that some institutions will regret their choices as they find out that their partners pose real threats. Tech companies may become banks' direct competitors, or their offerings may create weaknesses in banks' online security. Alternatively, tech partners will be accused of bad behavior (think red-lining or insider trading). Suddenly your bank's reputation is on the line.
So what's a financial institution to do to avoid this type of regret? It may be helpful to take the same steps that many thoughtful people do before they tie the knot.
First, take the necessary precautions before agreeing to a partnership.Have you done a thorough review of your betrothed? Does the company have a solid risk management team that possesses an understanding of enterprise risk management? Don't just check whether they have a compliance program. Make sure to review that program with an eye toward remaining current with rapidly changing regulatory requirements. As with any connection, ensure that you both want the same thing out of the relationship. Set clearly defined objectives about how each party envisions their long-term business strategy at the very beginning.
Second, think about a prenup. Some relationships don't work out. Devise your exit strategy before getting in too deep. If you are going to align your firm's interests with those of another company, be brutally pragmatic. Discuss and plan for all eventualities should you need to extricate yourself from the entanglement.
Lastly, consider your options carefully beforeyou give up the single life. You may decide that you want to brave the markets alone. After all, your institution could be capable of competing in the rapidly-changing market without a partner.
However, as firms start to pair off, there will be fewer and fewer dance partners left. Therefore it is definitely time to weigh whether you want to find the right technology partner before all the good ones are taken.
Richard Magrann-Wells is executive vice president and North American practice co-leader for Willis Financial Institutions Group. Follow him on Twitter @banklawguy.