Fintech collaboration requires mutual adaptation

January 9, 2019

A blog post by Sam Friedman, insurance research leader, and Michelle Canaan, insurance research manager, Deloitte Services LP

Interviews with those on the front lines forging a new fintech ecosystem reveal a host of challenges hindering cooperation between financial institutions (FIs) and startups. The goal is to combine the best of both worlds—the technical know-how, transformative thinking, and entrepreneurial culture of fintechs with the industry expertise, capital, and brand power of incumbents. Yet, realizing this vision often turns out to be quite complicated and even frustrating, to the detriment of fintechs and FIs alike.

Many FIs we spoke with are still struggling to interact effectively with the fintech community, where many players have less industry-specific experience; the operating model is generally fast-fail; and entities usually aren’t as tightly regulated. Fintechs interviewed had their own set of complaints as outsiders looking in, citing difficulties striking and executing development deals with more bureaucratic and compliance-focused incumbents.

Our report—Closing the gap in fintech collaboration: Overcoming obstacles to a symbiotic relationship—goes into detail about roadblocks that undermine productive co-development of fintech solutions, while offering potential workarounds. Read on for key takeaways from the report.

Incumbents are avoiding fintechs that don’t understand their specific industry

One point we heard repeatedly is that FIs have become much more demanding about what they expect from fintechs that pitch products or investment opportunities. The focus has shifted from “cool” generic ideas to practical solutions addressing problems specific to a particular financial service sector. This shift has impacted investment trends, with capital increasingly being directed at more established fintechs rather than brand new startups.

To overcome this hurdle, fintechs need to refine their pitches to align to real-world challenges for the target FI’s segment, while demonstrating both industry and technical expertise. One investment management fintech—whose founders already had extensive experience in the industry—touted this as a big competitive advantage, enabling them to make proactive decisions early on about how their architecture should be built. Knowing ahead of time where legal and compliance issues might arise could save a year in the development cycle, they said.

Fintechs confront organizational barriers in having proposals considered and executed

Incumbent companies are often siloed, with each business unit or department making its own decisions on whether to invest in, buy, or partner with a fintech. "Sometimes it's hard to find out who to speak with to learn how to reconcile what one unit may be doing versus another, or if an internal conflict arises", said one accelerator—an intermediary that helps startups get off the ground and connects them with potential investors and partners. Basic internal awareness and communication about fintech initiatives within incumbents are often lacking as well. 

To overcome such structural inhibitors, incumbents should consider establishing a precise engagement path for fintechs, with a single point of contact who is aware of development efforts across the enterprise, able to coordinate efforts by the various departments involved, and positioned to help navigate around any roadblocks that arise.

FIs struggle with setting benchmarks to project results and measure success

Most FIs said they prefer to see evidence fintechs can deliver on what they promise, rather than place their bets on purely theoretical pitches—another factor likely spurring later-stage investments in existing companies, rather than pure startups. Yet, FIs also confessed that establishing quantitative benchmarks can be challenging when dealing with fintechs, which often lack a lengthy track record or employ relatively untested technologies. In the financial services industry, imprecision—particularly in calculating results—is unconventional. Such ambiguity could potentially complicate or even paralyze collaboration, investment, or acquisition decisions.

Institutions may benefit from taking a broader, longer-range, and more qualitative view in measuring success of fintech investments. Some FIs define fintech ROI as “return on innovation.” What is the impact of a fintech solution on ease of doing business and the client experience? Which business units are changing their platform or products because of engagement with fintechs? As one global bank said, “Success is really measured by how this relationship helps move our vision forward.”

Changing the mindset

Despite these obstacles, fintechs will likely continue to drive financial services transformation, serving as a marketplace for innovation. Still, incumbents and fintechs probably have a long way to go before settling into a more systematic, truly symbiotic relationship.

A big part of the problem could be that too many incumbents see fintechs as just another type of vendor. That may be natural, as institutions seek to normalize relations with those they might have once seen as threatening disruptors or potential competitors. But in the long run, treating fintechs as just another product peddler is likely to be a less effective approach than dealing proactively with them as collaborative co-developers. Indeed, some FIs told us it’s sometimes easier to just acquire a fintech outright, rather than deal with all the potential friction a partnership with an outside firm could generate.

In any case, FIs and fintechs will both likely need to be more open-minded, tolerant, and accommodating to facilitate, rather than hamper, efforts to work together to achieve innovation and ultimately transformation. By realizing a mutual need for collaboration, the old and new guard are both more likely to thrive in a competitive landscape being disrupted not only by emerging technologies, but by evolving customer expectations.