Fintechs and Banks: How the partnership is evolving


While fintechs and banks may have once been seen as competitors, their relationship has grown over the years. With market shifts and evolving customer needs, new models of working together have emerged, expanding customers’ options and opening doors for new ways of fintechs and banks to work together in mutually beneficial ways.
A recent PaymentsJournal podcast looked at the state of these partnerships and how they’re driving embedded payments growth. The episode features Bryan Schneider, Product Head for a Fintech Strategy and Partnerships for U.S. Bank who recently helped launch the bank’s Connected Partnership Network, and Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research. They discussed how innovations like open banking have fueled cooperation between banks and fintechs.

Opening doors through open banking

Historically, banks aimed to serve as a one-stop shop for meeting their customers’ needs by building in-house solutions or partnering with third-parties to white label their solutions. While this approach enables banks to meet many broad customer application needs, it can often cast aside the specific front-office or back-office functionality needed to meet unique industry workflows or use cases. Fintechs have successfully helped fill such voids by creating specific user experiences, workflows and connectivity to address the market needs. In some cases, this has meant even competing with banks by delivering their solution with fully integrated payment capabilities traditionally provided by their bank. But buying behavior has changed, and customers demand more control over choosing their desired banking and technology partners. Gone are the days of either-or, says Schneider. Open banking has opened new doors.
Powered by interoperability and collaboration between banks and fintechs, embedded banking revolves around creating a streamlined process for companies to originate everything in one place versus having to log into multiple systems. It puts the control back in the hands of the customer, and the expertise in the hands of the most capable banking and technology partners.
 “It might seem ideal to be all things to all clients, but the reality is that it’s nearly impossible, as evidenced by the massive ecosystem of general fintech and software solutions in the market,” Schneider said. “They support these different partnership models with more of a plug-and-play experience, where a customer can choose the software and choose their banking partner based on counterparty risk and payment capabilities.
Banks and fintechs alike want to make decisions around what their clients expect from them. And because those expectations and needs vary with each customer, there must be different models for meeting those needs.
“In the conversations I have with banks, we always talk about the importance of having a pursuit profile that fits what you’re trying to do,” Bodine said. “You can’t be everything to everyone, especially with regard to the tech stack. You can get mired in unnecessary, counterproductive things.”

Solutions that add real, tangible value

Honing in on the key strengths and priorities of individual banks and fintechs means customers now have the ability to build solutions and workflows—collaboratively—that are most powerful for them. “That’s where these partnership models are helping us meet our clients where they are in their digital journey,” Schneider said.
For example, companies want to reduce expenses through the automation and optimization of their processes. Paper checks are expensive to deal with, so the focus shifts to driving digital payments to mitigate costs. And when they learn the cost savings or even rebate revenue potential through automation and other solutions, they realize there’s tangible value in pursuing them.
That’s when companies start to view their accounts payable groups not just as cost centers. They have unprecedented opportunities to turn their payables into a profit center that can even, at times, start to cover the expense of running their business.
However, we know many companies face obstacles in moving toward these models because they rely on outdated tech stacks. It’s important to dig into the details and bring in consulting partners and research strategists who possess the expertise to ask the right questions. It’s in this deeper exploration that vulnerabilities, risks, and true opportunities for success become evident.
One of the biggest struggles is maintaining connectivity across these systems and standardizing data. That can take some of the risk out of the equation. The end-to-end experience becomes much more powerful than it would be otherwise, when companies try to wire things together that were never meant to be merged.
“We’re starting to see powerful user experiences that solve problems beyond simply making payments,” Schneider said. “Folks are biting off pieces that are very doable, then bolting these systems together to create powerful integrated solutions. I’m curious to see what’s going to unfold here, especially with open banking.”

Working With Trusted Partners

Open banking extends the capabilities to which companies have access to in ways that may not otherwise be possible without such bank and fintech collaboration. But the value goes well beyond the functionality. Customers not only regain control over who they work with but regain control over the trust and security of those choices.
Counterparty risk is critically important, particularly in light of recent bank failures. Companies are grappling with essential questions: Who are our partners? What risks may be associated with this partner? Can we future-proof and retain the flexibility needed to evolve?
In partnering with a fintech, it’s important for a company to inquire about the entity responsible for processing payments behind it. Companies need assurance that, should an issue arise during payment initiation through the fintech, they retain control over access to their funds.
According to Schneider, recent bank failures made clear the importance of being able to pick your fintech software and your banking partner, where companies have a lot more control, direct visibility, and access to their cash.
As companies do their due diligence on any third party with which they work, it’s critical they understand a fintech’s financial stability, the measures they have in place to mitigate potential risks, and their ability to support a desired integrated banking partner. If the fintech processes all payments through a single bank, ascertaining the percentage of payments that this company represents is also important.
“We’ve seen some fintechs that partnered with smaller banks who are probably the best aligned to handle transaction flows, but maybe the client who had contracted with the fintech was expecting that from the fintech,” Schneider said. “We’ve seen a fintech partnered with another third-party payment processor. An ACH (payment) that might take two or three days could take five, six, or seven. That lack of visibility for an ACH payment has been something that our clients are starting to ask questions about.”
“It’s surprising to me how few organizations actually do the level of diligence that they should be doing,” Bodine said. “The natural one is to look at financials, but I’ll ask basic questions like, ‘What’s the burn rate?’ (and) ‘How much money does this company have in the bank?’ I’ll hear, ‘Not really sure’ or ‘We didn’t really ask that.’ When I ask about a bank’s API-first approach, I often hear, ‘What do you mean by API-first’?”

Looking ahead

The relationship between banks and fintechs still has a long way to go, if for no other reason than banking models in the U.S. will continue to grow as embedded payments continue to mature.
As Schneider points out, banks and fintechs alike are prioritizing and investing in systems integrations and delivering frameworks at scale that meet customers’ needs. Embedded payments are here to stay, he says, and will drive exciting change in the months and years to come.
“It’s going to be fascinating to see how things get more efficient and drive a lot of cost out of the system.” Schneider says. “That’s what we’ve always been after: delivering value back to our clients in a way that has integrity and trust in the system.”




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