Vendors must provide detailed costs, including license fees, per-user costs, and implementation, integration, support, maintenance, and test environment costs, for the life of the contract. Risk assessment is typically performed by a bank’s procurement/contract unit, with well-def ined processes to review the vendor’s finances, contract performance record, trade payments, and the like. In this bank’s case, most of the origination vendors under evaluation offered the needed web portal, but related addon module, maintenance, and variable volume pricing prompted it to consider a fintech partnership. Partnering with a fintech entails the same performance, cost, and risk considerations, but there are three critical differentiators: 1. What’s the problem to be solved? Sounds like common sense, but a fintech partnership should necessitate an extensive evaluation of the underlying need, such as filling in product or service gaps, or, in this bank example, offering borrowers a digital channel for applying and getting to closing quicker on a commercial loan as their primary competitors offered. Clear objectives help the bank and fintech determine if the match is on solid ground from the start. A fintech partnership should offer the bank an upside—quantitative and qualitative—that simply isn’t available at more favorable cost, risk, and performance measures under the build or buy options.
2. What’s the difference between buying vs. partnering with a fintech? Is it a shared risk and shared reward? Does the reward justify the risk? Or is it just the innovation culture of the third party? The definition is critical as the process of evaluating a fintech’s performance, costs, and risks entails unique considerations from a typical vendor evaluation. Many partnerships are really just vendor relationships. That’s okay. In many cases, banks with extremely low risk appetites prefer the typically lower risk of a vendor relationship. One fintech exec noted how impossible it is to run many banks’ risk gauntlets because they don’t understand what they are getting into. A bank’s procurement/contract function often isn’t equipped to evaluate fintechs, which often have huge R&D expenditures that enable them to devise cutting-edge technologies, and likely won’t pass standard vendor evaluation criteria. Instead, a potential fintech partnership requires Legal and Finance to play critical roles in the evaluation, as a shared risk/reward dynamic needs to be understood and quantified. Lastly, the board should be involved in any significant partnership decisions, as many entail unique risks or potential impacts to the bank’s strategic vision. 3. I s t he at t rac tion to a f intech largely due to its ability to invest and move quickly with innovations and not really a desire to share risk/reward?
That’s important to know because there are different types of vendors that could fit the bill within a bank’s risk appetite. While there are some mature vendors driven by near-term profitability who don’t move as quickly with new capabilities, there are other start-up vendors driven by revenue and client grow th who move more quick ly. Some even have banks as owners. In turn, the lines between what is a fintech or vendor and between build-buy-partner are blurred.
And the result? The mid-sized bank’s analysis of a fintech partnership revealed that the incremental cost and risks weren’t warranted given that the needed functionality was included with the origination system that the bank was simultaneously evaluating and purchasing. By vetting each option via a buildbu y - pa r t ner e v a lu at ion , i nc lud i ng performance, cost, and risk considerations, the bank gained tremendous knowledge for future use in evaluating a fintech partnership and the critical factors in making a partnership a success for both parties.
Joe Ganzelli Sr. is senior director at Cornerstone Advisors. He spent 15 years as a banker. Sam Kilmer is senior director at Cornerstone, and has worked at two mid-sized banks and two fintechs.
Consistent performance management approach
very build-buy-partner situation has critical performance, cost, and risk considerations to manage. 1. Performance must be monitored by line - of- business executives to ensure the bank is getting the benefits projected from the system. Banks must commit to operationalizing all the features that won the execs over. 2. Cost variables require continual
monitoring. Volumes or other pricing parameters may change during contract terms and impact the original justification. Bank CFO’s should not wait until contract renewal to evaluate original expenditure decisions, as the cost-benefit relationship will change. 3. Risk factors are critical. They include tracking vendor or partner performance and assigning risk ratings.
The complexity of the vendor-partner ser vices and risks dictate periodic reviews, ideally by a risk officer. Vendor management systems can provide tools. Fintech partnerships often can be more complex to assess. Finally, it is best that the assessors of these three factors be different executives. Not only due to expertise, but as a healthy check and balance.