For startups to bridge banks’ fintech gap, innovation execution needs a reality check

This is the second article in a two-part series on bank-fintech collaborations based on the 2019 State of Banking Innovation Survey, a study conducted by Bank Innovation and INV Fintech.

While banks are pushing for more fintech startup collaborations, new data shows that working alongside startups can uniquely “bridge” the fintech gap for financial institutions.

Even with the significant challenges these partnerships pose, working with nimble startups can ultimately be effective for financial institutions, according to an exclusive study this summer by Bank Innovation and INV Fintech, a startup accelerator.

Fiserv – the technology provider INV Fintech partners with – recently shared what has now become a widely accepted view in fintech: “[Startups] have quickly moved forward with innovation, offering simple but powerful services that fill gaps in the offerings of traditional banks and credit unions.” Our survey further confirmed the complementary nature of these relationships.

Beyond aggressive plans to continue collaborating with fintech startups, financial institutions are aware of the need to pursue these ventures to overcome internal limitations. As an example, when asked about the main impediments to innovation, the top categories for banks and credit unions in our survey were culture (24%) and corporate bureaucracy (20%), areas where fintech startups clearly have a competitive advantage.

On the startup side, there are also clear benefits to be gained from these joint efforts. As Ben Schack, head of US digital partnerships at BMO Harris Bank, pointed out, “ [Startups we work with can benefit from] our brand, both here in the U.S. and in Canada, the balance sheet, the existing customer base and, in some cases, our physical distribution and network, which can be hard for fintechs to replicate on their own.”

As a result, benefits on both sides are evident, but given the low success rate of past efforts, the “recipe” to make these partnerships effective still seems elusive for most financial institutions.

We believe the practices financial institutions and startups should adopt are well-understood, but often ignored. Below we provide three recommendations to enable these partnerships. These recommendations will seem familiar to many, but unfortunately have yet to be adopted by most players in the space, who should move from high-level thinking on these priorities to effective execution. Our perspectives are informed by a combination of findings from our survey and INV Fintech’s lessons from our day-to-day work with startups, financial institutions and our extended network of mentors.

1. Startups should be proactive in addressing financial institutions’ concerns around security risk and regulatory compliance
According to our survey, from the perspective of financial institutions, the most significant challenges to make fintech-startup collaborations successful were security risk and financial institutions’ standards for regulatory compliance.  It is natural for heavily regulated entities to be cautious when engaging with startups that are sometimes not aware or don’t fully grasp the complex nature of these issues. Startup founders, a subset of which have unfortunately followed Mark Zuckerberg’s motto to “move fast and break things,” should address these concerns early on.

Pam Perdue, chief regulatory officer at Continuity and an INV Fintech mentor, advises fintech startups to “be proactive in your handling of regulation so that it doesn’t present a friction point downstream.” Her advice is on point given that, as she correctly states, “Ultimately, if your clients [i.e., banks and credit unions] are being put on the hot seat due to pressure they receive from their regulators or supervisors — that’s going to translate back to you.”

 2. Banks should institute an innovation-forward culture and streamline processes to facilitate more opportunities for startup collaborations
Over 30% of startups in our survey selected “cultural mismatch with financial institution” as one of the most significant obstacles to creating successful partnerships. There are numerous aspects for banks to consider in addressing this issue. Based on our experience, instituting an innovation-forward culture and removing unnecessary bureaucratic barriers to take full advantage of potential opportunities with startups, are of pivotal importance. Banks understand the need to do this, but have been reluctant or otherwise unable to change. Removing even small bureaucratic barriers goes a long way.

In an interview with this publication, Marc Butterfield, senior vice president of digital and payment solutions at First National Bank of Omaha, described how his bank prioritized culture as a key component to more effectively collaborate with fintech startups. He stated that for banks to be successful, they should go beyond innovation theater and focus on innovation practice.

“Innovation theater is ‘Let’s build a cool space and buy a bunch of hardware, and people will see that and think it’s really cool’,” he said. “But you’re not really embedding that into the culture of banking.”

To institute an innovation-forward culture, FNBO has introduced hackathons, pitch competitions, employee challenges, company-wide competitions and more.

Beyond these practices, banks also should streamline processes to decrease unnecessary steps and requirements from fintech startups with which they seek to engage. For example, in a conversation with a regional bank, we were told they had recently reduced the amount of initial paperwork a fintech startup had to complete as part of the bank’s procurement process from hundreds of pages to a little over 20. This effort has made it significantly easier for the bank to work with fintech startups and it has not introduced unnecessary risk. This boils down to minimizing hurdles to partnerships – before the partnership work begins.

3. Banks should build an API environment to feed external innovation and be able to quickly test and deploy fintech startup propositions that are aligned to their business strategy
In many cases, we have seen banks’ efforts to partner with fintech startups ultimately fail, even with a clearly articulated business case. Beyond hurdles around compliance and procurement, in many cases, institutions lacked tools to quickly test and subsequently integrate an external product proposition. Building an API environment is one solution banks in the U.S. should consider, even without a push from regulators, like in other markets.

APIs have been a hot topic for several years, but again most banks and credit unions have been slow to capture the opportunities they offer. In an INV Fintech mentor session conducted this summer, Ismail Chaib, COO at the Open Bank Project, described how both banks and fintech startups stand to benefit from open APIs. According to Chaib, banks would benefit by speeding up their innovation efforts, thus being able to quickly bring new products and business models to market. Fintech startups, benefiting from access to data and bank customers, will naturally gravitate towards and find it easier to collaborate with players who follow this approach.

Echoing this view, Fiserv also recently pointed out that “for financial institutions of every size, a robust API environment enables quick delivery of innovative, pre-approved applications to consumers to enhance customer satisfaction and provide competitive differentiation.”

Following these three recommendations are important steps for banks and fintech startups seeking to increase the success of partnerships. Despite the challenges, we at INV Fintech have the firm belief that, given the right conditions, banks and fintech startups can effectively work together to “bridge” the fintech gap.

Rodrigo Suarez is the principal of INV Fintech, a NY-based startup accelerator focused exclusively on financial technology.