Partnered up: Banking and the digital ecosystem in 2022
Ecosystems, digital partners, and collaboration. These now-familiar terms are commonplace in the banking, finserve and technology industries.
As legacy systems struggle to morph into entities that can operate on the new digital plane, partnering has become more than just a buzzword. For many companies, these business relationships are their salvation in a time of unprecedented change.
While fintech startups have the advantage of designing their core processes and models around digital transformation, they often hit stumbling blocks when it comes to growing their businesses.
By comparison, incumbents hold all the cards with a ready database of willing customers and usually a big budget to finance the seachange. However, for those well-established, hallowed halls of finance, adopting new technologies and practices is expensive. It’s also disruptive, and entirely alien in terms of lean and agile principles and the latest BI practices.
The remedy for this situation lies in collaboration and ‘side line’ rather than core developments.
For example, many banks today, rather than attempt to transform themselves too fast and risk mistakes, have taken to launching digital versions of themselves as subsidiary arms. And they partner with software and technology solutions companies to make the magic happen.
Strictly business partners
According to Nikolai Hack, Head of Strategy and Partnerships at Nucoro, the partner networks revolution has resulted in a couple of marked events. He says that two things have happened in recent times.
The first is that partnering (as opposed to building or buying) has moved from the fringes and auxiliary parts of a proposition to its core. He says, “Whereas in the past, you would have partnered on non-essential aspects like KYC checks and digital signatures, now you partner on key parts of the offering like your lending or saving products.”
The second change is that whereas partnering used to be mainly a tool for smaller players to move faster, it has now also moved from fintech and challengers to the biggest incumbents in the space.
Exactly when these shifts took place is difficult to decipher, but Hack believes there is a fine line between partnering and the more classical way of looking at it as using the services (or integrating the products) of an outside player.
“One thing is certain, however, the government-imposed lockdowns and forced closures of physical businesses have shown many players that they need to move faster in their digital transformation - and partnering allows you to do that,” he concludes.
Todi Pruteanu, VP of Ecosystems at FintechOS, offers insight into this. “Through a partner network, banks can accelerate the speed-to-market and distribution of fintech solutions, and in return, fintechs can gain access to banks and the banks’ customers,” he says. “The reason why these networks have grown in popularity because they benefit both parties.”
Pruteanu believes the relationship between fintechs and banks is complicated and becoming more complex. “Fintechs initially set out to replace banks and “eat their lunch”. Many are still looking to do so. But over time, competition has evolved into collaboration.
“Whether a bank is small or large, they’re all collaborating with fintechs. That could be through partnering with them, acquiring them, or funding them. It’s quite clear that competition has made way for collaboration, where we now live in the era of the partnership.”
A shift in perception
Some experts say the shift has been due to several factors, and that the incumbent sector embracing partnerships is indicative of changes that are yet to take place.
Mahmood Noorani, CEO of Quant Insight explains, “The banking sector is quickly waking up to the fact that partner networks with specialist fintech providers can have a major impact on performance, cost-saving, and customer services. Rather than seeing fintech companies as a threat, the big banks should see them as a hotbed of innovation that can enhance their existing services.”
Generally, says Noorani, the real push began in March 2020 - uncoincidentally at the start of the pandemic. Up until this point, small fintech operatives and incumbents had been competing, with banks in a superior position.
“Banks have talked a strong game on fintech and innovation, but in practice, few are really moving. This has started to shift in the last 18 months. In the investment space, we’re already working in partnership with several major banks providing quantitative financial market analytics and trading insights, to enhance decision-making.”
Noorani now believes fintechs have the upper hand. “From analytics, AI capabilities to cloud computing and payments services, fintech companies have so much to offer traditional banks,” he says.
Advantages of partner networks
The pros to partnering up with an expert operative are numerous, and, says Hack, provides three, distinct advantages to banks. These are:
- Reducing risk and complexity By relying on a tried and trusted technology or product that is already running and operating successfully elsewhere you can remove a whole lot of uncertainty from the decision-making process for or against a project.
- Faster innovation A core principle of the modern economy is the separation of tasks and the efficiency gains we derive from it. By focussing on what you're good at and getting someone else to do the other bits, everybody can play to their strengths and bring new propositions to life or launch a new product faster than otherwise possible.
- Developing outside the box Banks' legacy systems are hopelessly convoluted and reform or innovation from within is hard, if not impossible. Connecting an existing stack to something that runs mostly outside your architecture can sometimes be the only way forward to do anything meaningful new at all. And it buys you time to work on the restoration of the core and transition your organisation bit by bit instead of all at once.
However, any large-scale move cannot be without consequences. Hack advises that there are aspects to be mindful of. He says, “You have to be aware that you won't be building up native IP and owned capacity in whatever area you are partnering in. The core expertise for technology, process, or product will sit with the player you cooperate with, not with you.
“It is unlikely that you want to be, or can be, an expert in all fields that collectively make up your business proposition. Hence this focus on what matters should probably help.”
Despite this drawback though, on balance, as long as companies do their homework and make the necessary preparations, partner networks are a good idea. He continues, “You have to rely on the partner to do their job right, probably without knowing much about their secret sauce. Since you are more likely to partner in areas that you are less familiar with (which is the reason why you are partnering in the first place) you have to make sure that a proper due diligence process is in place.”
Pruteanu expands on this point, saying that partner networks can help to build a wider range of complimentary services and products to acquire more customers and boost profitability.
“To avoid problems, there are essential requirements that need to be in place. For example, there must be trust between parties. Without mutual trust, especially in a world where data privacy is becoming paramount, the relationship will be problematic.
“Moreover, financial service providers need solutions to any problem. Any collaboration must deliver a tried and tested holistic solution rather than a bundle of different and hard-to-connect tools.”
A boom in APIs
And ultimately, technology and the setup of legacy systems means partnerships are not only advantageous but also unavoidable. Even so, making them work in practice is not without its challenges.
Paul Crerand - Field CTO EMEA at MuleSoft, explains, “Making partner networks work in practice is often far from straightforward. The reality is that banks’ IT operating models aren’t typically geared towards third-party collaboration. All too often, banking IT is a complicated mix of legacy systems, where valuable customer data is scattered across disparate silos. This makes it difficult for banks to draw the right customer data sets together to collaborate with others.”
Crerand says that to navigate these challenges, banks are increasingly implementing API-led integration. By placing APIs in front of each system they need to draw data from, banks can become more composable, exposing their IT assets as a network of reusable capabilities that others can discover and tap into.
“A third-party wishing to make use of a certain banking capability can simply plug the bank’s API into their own product or service, to create a connected customer experience. The more that banks are able to open themselves up in this manner, the more opportunities they have to join new value chains, unlocking more revenue as a result.”
Partner networks of the future
Strategic partnerships are here to stay - and the technology driving them will continue to iron out the challenges many of them, still in their relative infancy, are facing. This is a conclusion most experts agree on.
Noorani says, “We fully expect partner networks to expand dramatically in the coming years, particularly in a post-Covid economy. Forward-thinking banks will look to nurture partnerships as well as acquire and embed fintech into their existing services to stay ahead of the competition.”
Hack also believes this is the logical step forward, because, in an ever more complex world of constantly evolving technology, “regulatory and commercial frameworks intertwined with faster-changing consumer demands and expectations, it is only logical that we will see more partnering happening in the future.”
Crerand concludes, that with customer expectations for frictionless digital services at an all-time high and continuing to rise, “APIs will become a crucial cornerstone of banks’ IT strategies, offering the flexibility and agility they need to become ‘digital ready’ and continue to redefine customer expectations and industry standards for connected experiences.”
API trends in banking
APIs have transformed the partner network space because they have simplified the act of diversifying services, products, and solutions. Application programming interfaces (API) streamline programming and are defined as ‘low code’, because they provide all the required building blocks, which are then put together by the programmer.
Paul Crerand of Mulesoft offers his thoughts and a case study on the use of APIs in banking. He says, “APIs will emerge as the preferred solution for building partner networks, acting as a central mechanism for enabling the integration that banks require. We’ve already seen how this works in practice.
“For example, UK-based SME-lender Allica Bank uses APIs to connect its apps, data, and devices, so it can quickly bring together all of its digital capabilities and plugin those of other organisations to create market-leading experiences.
“Allica’s brokerage portal has been rated the best on the market by its customers because its API-led approach enables it to draw data from a variety of external sources to speed up the overall lending process dramatically.”