In the past decade, rapid technological developments left no area of life untouched and significantly changed the way we work. Naturally, these changes led to a paradigm shift regarding how businesses operate, collaborate and partner. In the financial sector, fintech startups have moved from serving niche sectors into the broader market. They are establishing novel digital customer experiences as well as fulfilling the emerging needs of new and old customer groups alike. The trend of partnerships between fintechs and incumbents has accelerated these developments that influence the financial value chain, including banking solutions, payment providers and authorities.
Collaboration between incumbents and new players can promise enticing opportunities; however, many of the formed partnerships lagged behind expectations. Almost seven out of 10 fintechs identify partnership as vital but challenging and more than half of the corporates interviewed identify with the statement “Startup-corporate partnerships are vital for FinTech innovation but too difficult in practice.” (Fintech partnerships 2020, p. 6). To identify the underlying reasons for these difficulties, EY and Copenhagen Fintech commenced a deep dive into the Danish fintech partnership landscape. We interviewed multiple key stakeholders in traditional financial institutions and executives from fintech startups to obtain a multifaceted understanding of their experiences with partnerships.
In our interviews, we recognized four common themes that create friction in such partnerships: culture, governance, technical experience/knowledge and mutual buy-in. Subsequently, we have sketched out a framework to systematically address these pain points to align expectations and build a solid foundation for collaboration.
Culture — “How can FinTech partnerships turn cultural differences into a competitive advantage?”
(ibid., p. 7).
It is almost inevitable that when cooperates and fintechs collaborate, there will be a clash of cultures. On the corporate side, a vast amount of experiences and resources often come with lengthy decisions making process and a complex hierarchy. On the startup side, speed, innovation and the ‘newcomer culture’ often misalign with the corporate reality. These characteristics can lead to fragmented collaborations and contrary timeline expectations. To overcome these differences, both partners must actively work on creating a shared timeline while emphasizing the importance of mutual persistency. To highlight the relevance of the partnership, it must be organization-wide across both parties and encapsulate the strengths and weaknesses of both.
Governance — “Which governance structure ensures interest from both corporate and FinTech?” (ibid., p. 9).
Most corporates and fintechs differ substantially in their approach to governance. Financial institutions have deeply ingrained certifications, risks and compliance into their culture and have long-standing organizational structures to manage and adhere to new regulations. For most fintechs, however, compliance can come second when building their business case. This disparity can add to already complex negotiations involving numerous stakeholders and potentially jeopardize partnership opportunities. To overcome these differences, both partners need to work rigorously on understanding the regulation and governance requirements of one another. Fintechs need to make sure to provide the right kind of documentation and incumbents need to allow for some slack in the project governance activities.
Technical experience & knowledge — “How can a mutual, technical vocabulary facilitate complementarity between partners?” (ibid., p. 11).
Fintechs were born in the digital era of cloud solutions, artificial intelligence (AI) and data-driven business models. When they try to tap into the often highly segregated infrastructure of financial institutions, fintechs frequently hit a wall. To break through this wall, both partners must assess the technical capabilities of both parties and establish a common vocabulary that develops complementarity.
Mutual buy-in — “How can partnership mandates promote mutual buy-in and openness between parties?” (ibid., p. 12).
The above-described differences can lead to a lack of commitment of both parties and in turn, result in heightened frictions. To harvest the full potential of corporate-fintech-partnerships, the importance of the partnership must be emphasized and promoted by top management. To ensure long-term engagement and foster innovation, a partnership framework that outlines accountabilities, decision-making processes, and criteria for success is necessary.
EY and Copenhagen Fintech both believe that successful partnerships are anchored via a collaborative spirit and commitment from all parties. With the framework outlined in our report, we aim to prepare both fintechs and incumbents “for the meeting of different cultures and levels of maturity in terms of technical implementations, regulatory compliance and the ability to leverage the strengths of partners in order to grow their own organization” (ibid., p. 5).
Please find the full report and detailed accounts of twelve fintech-corporate-partnerships here.