State of play: fintech partnerships

Each month, fintech analyst Philip Benton explores a new topic and assesses the “state of play”, providing an in-depth analysis and understanding of the market landscape.

This month we take an in-depth look at fintech partnerships.

The days of banks trying to be everything to everyone are no more.

In fact, these days you can get credit without applying for a credit card, obtain a mortgage without walking into a bank branch and manage your money without requiring a current account.

The choices are endless, but as a consumer, having 20 different apps on your phone to manage your finances is not viable, which in turn has given rise to super-apps (as discussed in a previous column).

To build a super-app, a broad ecosystem is vital, which is underpinned by strong partnerships. This is very similar to the business model of Costco – high-quality products sourced directly, sold at low prices to loyal customers. There are four main types of partnerships possible in fintech, as outlined below, ranging from purely economical to embedded partnerships.

If you can’t beat them, join them

The early days of the fintech revolution were about “disrupting” banking, but incumbents and fintechs now increasingly work together to lead innovation. US incumbent Bank of America and UK payments start-up Banked recently partnered to launch a new online payments solution, while UK incumbent NatWest Group has partnered with paytechs TrueLayer, GoCardless and Crezco to launch its variable recurring payments (VRP) solution.

Technology is moving at such a rapid pace that building products in-house makes little sense as the value-add is how you develop on top of the technology stack, not in building the foundations. If JP Morgan Chase, with the world’s largest technology investment budget (according to Omdia), opts to partner with Thought Machine, a challenger core banking provider, as opposed to using its own vast team of developers to build in-house, then it’s clear what direction the industry is heading.

Modern technology stacks have enabled new entrants in financial services to adopt an “a la carte” approach to deploying banking products. This has enabled banks to offer their products “as a service” to non-financial services brands through embedded finance by consuming specific pieces of the banking stack. Embedded finance is just one of a number of emerging trends which will alter the relationship banks (and fintechs) have with their customers. Therefore, establishing and maintaining strong partnerships is critical to ensuring relevance in the future of financial services.

Software vendors are partners, not providers

The evolution of financial services is changing at a rapid rate, whether it’s how we pay, invest or save. Banks/fintechs require the support of software vendors who are agile, flexible and forward-thinking. Therefore, when making purchasing decisions, it’s not just about choosing the best off-the-shelf product for most financial institutions; it is also necessary to consider a vendor’s ability to support your firm’s aspirations. This requires a strong partner—one that enables and drives innovation, offers a strong user experience and provides advice on how to launch new products and services quickly and effectively.

Solution breadth of vendors is increasingly relevant, whether provided in-house or through a partner ecosystem, with financial institutions less likely to adopt a “best-of-breed” policy when selecting vendors and having a desire to work with fewer vendors who provide easy access to wider functionality. Vendors should embrace partnership opportunities with third-party providers through adoption of the marketplace model by opening their APIs in order to add value to the ecosystem.

Although broad functionality is an important consideration when selecting a product, the vendor ecosystem should not be discounted as it provides the opportunity to tap into a multitude of niche suppliers. Future innovation is likely to be driven through this ecosystem, benefitting the financial institution in the long term by unlocking advantages beyond the platform. Banks/fintechs should select partners with digital expertise and industry domain and enterprise-grade capabilities, as well as a digital-mindset approach to innovation. Growth requires a partner that can be trusted to respond quickly to challenges as they arise and recognise and respond to the difficulties a bank/fintech is facing on a real-time basis.

Curation will be king in fintech, underpinned by partnerships

The shift to digital banking has raised expectations around customers’ relationships with their banking provider. They expect instant support, real-time resolution and easy access to financial services that are relevant to their needs. In the future, artificial intelligence (AI) and machine learning will be able to predict and recommend financial services to a consumer before they realise they need it themselves.

Owing to easing banking regulation for new entrants and the introduction of open banking, several start-ups have been able to compete with banks on specific segments of money movement. Mass-market consumer banking is in decline with new entrants emerging to serve specific communities, including Nerve (banking for musicians), Pancea Financial (banking for doctors), 11Onze (banking for Catalonians) and Daylight (banking for the LGBTQ community).

Increasingly, consumers are having less direct contact with incumbent banks through utilising fintechs that leverage banking licenses from existing players or third-party providers that pull banking data through open banking technology. Identifying the right kind of partnerships is crucial for navigating emerging technologies, whether it’s web3, crypto or the metaverse. Consumers, corporates and institutions will place trust in their direct provider to curate a hyper-personalised service that utilises their wider ecosystem of partners and ensures a superior user experience.

About the author

Philip Benton is a senior fintech analyst at Omdia and writes analysis on the issues driving technological change in financial services. Prior to Omdia, he led consumer trends research in retail and payments at strategic market research firm Euromonitor.

In this column, Philip will discuss the technological implications and consumer expectations of the latest fintech trends.

You can find more of Philip’s views on fintech via LinkedIn or follow him on Twitter @bentonfintech.