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Partnering may be in fashion, but sometimes building or buying work best By Joe Ganzelli and Sam Kilmer, Cornerstone Advisors What critical considerations must banks factor into exploring fintech partnerships? The sidebar on the opposite page outlines factors common to all new tech implementations. Below are others, using a business-lending example at a mid-sized banking company.
t’s hard to walk the hallways of banking these days without hearing the buzz about exploring partnerships with fintechs. “Fintech” covers many things, but is often used to refer to nonbank f irms that leverage cutting-edge technology to deliver financial services directly to consumers and businesses. In that sense, banks initially viewed fintechs as competition, as they compete for lending, personal finance, payments, and other consumer services. But that view has evolved, as banks increasingly realize that the pace of technolog ica l change and customer expectations demands the advanced capabilities of fintechs, while fintechs need established bank customer bases. I n a dd it ion , t her e a r e s ome f i n tech companies—Mirador being one e x a mpl e —t h a t w o r k o n l y t h r o u g h f inancial institutions. So the ba nk-f intech la ndsc ape is an interesting one that has all parties exploring build-buy-partner options and morphing the separation between what is a fintech and what is a vendor. 26
Build, buy, or partner?
When it comes to organically creating needed customer functionality, banks can build capabilities themselves, buy tools from a vendor, or partner with a fintech. As with BBVA’s acquisition of Simple in 2014, there is also the option of acquiring a fintech that has built or acquired such capability. Even partnering has permutations. Chase’s partnership with OnDeck, for instance, involves an investment in OnDeck and use of OnDeck’s tools to acquire loans, but with the retention of loans as Chase assets. Beyond such higher prof ile f intech situations, the build-buy-partner framework of choices is one all tech companies face. And that is the point of the situation: All companies are increasingly tech companies—including banks. As the industry automates and shifts toward self-service delivery as the primary access point in the delivery mix of banking that includes technology, people, and facilities, only technology is increasing in the mix. That goes for both banks and fintechs.
A mid-sized bank in the $10 billionto $30 billion-assets range needed to automate its commercial origination processes and wanted to offer borrowers and third parties (CPAs, attorneys, appraisal firms) a way to interact with the bank via a digital web portal to submit loan applications and upload due diligence items. This was less of an issue for larger commercial clients serviced by relationship officers, but more for small businesses that want to do business with their local bank, but not be subjected to lengthy, extensive due diligence processes typical of larger commercial loans. It’s not an accident that small businesses prefer to deal with local institutions that take time to know and understand them, but those same small businesses don’t want to sacrifice speed, ease, or efficiency. When building a front-end business loan application and third-party processing portal, performance, cost, and risk considerations must be examined as well. But many banks quickly realize they don’t have the appetite for this development. In this bank’s web portal example, an analysis of the needed development effort revealed the bank did not have the resources in house to develop and maintain this portal, and the costs and ramp-up risks associated with building the needed infrastructure, or to subcontract it, would exceed that of other options for obtaining the needed digital presence. Buying the functionality would come with the broader commercial loan origination and portfolio management system functionality that the bank needed. Vendor performance, client references, system availability (especially for application service provider or cloud-based systems) can be documented and analyzed.
One bank’s experience