Wedding ring

Perspectives

Financial institutions partnering with fintechs

Not quite a happy marriage—yet

There’s a shake-out happening in the fintech world.

May 9, 2018

A blog post by Jim Eckenrode, executive director, Deloitte Services LP.

Change is coming to the fintech world. A recent Deloitte report found a slowdown in the pace of new start-up launches; from almost 720 new company formations in 2016 to just over 90 last year. But investor interest is not in decline. In fact, our report notes that private equity firms and others joined venture capital investors to drive total global investment in fintechs to an all-time high of $33 billion in 2017. We found similar evidence in the recent growth in the number of fintech acquisitions and initial public offerings. Our conclusion: There’s a shake-out happening in the fintech world.

So what should readers do about the changes occurring within the fintech world? Fintech by the numbers included a call for incumbent financial institutions to reevaluate their strategy for partnering with these small—and not-so-small—technology firms once seen as competitors but now increasingly viewed as potential partners. We are finalizing a new report to find out exactly how these marriages are progressing. In speaking with fintech CEOs, leaders both of digital strategy and of innovation at various global financial institutions, and leaders of prominent technology incubators, we learned that many have moved past the honeymoon phase—and that each side has some work to do.

As a preview of the new report that we will publish in a few weeks, here are several themes based on what we’ve heard so far:

Fintech by the numbers

Read our report
  • Perceptions of what a “fintech” is and are evolving. Some industry participants say fintechs include startups offering products and services that compete with traditional firms. Others view “big tech” companies and other startups that aren’t specifically in the financial services space, such as those providing artificial intelligence solutions, as fintechs. Some even refuse to use the term “fintech” any longer.
  • There is often a culture clash when the two sides come together. Financial institutions have the resources but not the freedom to do what they like, while fintechs are challenged by the opposite, possibly due to cultural or political challenges. Similarly, fintechs spoke to us about the risk of doing nothing, while the firms they want to work with may have the luxury of time to slowly build partnerships or solutions. As one fintech leader put it, “Time is your worst enemy.”
  • Many fintechs told us about the multiple hoops and long relationship-building cycles required when engaging with incumbents. We learned they find it frustrating to make their case to multiple groups—the business, technology, and compliance—to achieve a win. While acknowledging these challenges, incumbents told us there is too much at risk to fully open up their back-end systems and customer data.
  • Startups said they benefit from engaging with incumbents. Some say they appreciate the assistance from financial institutions to learn what they “don’t know they don’t know.” Others note they have addressed this issue head-on by bringing on board people with direct industry knowledge, which they say helps to shorten the deal cycle.
  • Financial institutions also are learning—many said they haven’t yet changed their cultures sufficiently to accept failure, work in teams, and become more agile in general. They also recognize that they can be hard to work with. As one leader put it, “We recognize we probably aren’t doing a good job in coordinating” fintech partnership efforts. This is understandable given the constraints and risks discussed above, but it appears that incumbents are learning from fintechs.
  • The world of good ideas is expanding. Many incumbents told us they are seeing an explosion of good ideas from all corners of the world, and that the US—specifically Silicon Valley and New York—no longer have a monopoly on innovation. This supports one of the findings from our first report.

Bringing together fintechs and financial institutions remains a challenge

Many of the fintechs and financial institutions we spoke with have been at this collaboration thing for a while. But most acknowledge they’re still facing challenges in bringing the two sides together. As one person put it, “In reality, it’s not a happy marriage.” We agree that while it might not be happy yet, early returns from our conversations suggest there’s more positive to come out of these partnerships. If the positives continue to outweigh the negatives, we believe they will find a way to keep working at it until they get it right.

Be on the lookout for more details when of our new report arrives in the coming weeks. In the meantime, we’d love to hear about your experiences with incumbents or fintechs. What’s working, and not working, for you? Where do you see the greatest opportunities and risks? Join the conversation on Twitter at @DeloitteFinSvcs.

QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.

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