The swiftly growing fintech industry is reliant on a raft of digital partners that provide technical solutions, security, payment options, AI services and more. Indeed, the sector is often referred to as an 'ecosystem' because so many elements are reliant on others to create a seamless network and service.
The old days of legacy system incumbents that handled all processes in-house, are well and truly over. The faster technology develops, the more sense it makes to join forces with digital partners, harnessing their expertise to manage elements of the business that would otherwise require massively expensive technology builds and additional staffing costs to run them.
Why have virtual partners become such a fixture in fintech?
Fundamentally, it boils down to two things: scalability and speed to market - particularly for businesses operating in the banking as a service space like we are. You have your brand and then a banking stack that sits underneath it which comprises of multiple functions that are either built in-house or provided by digital partners. Building a full service in-house takes a long time and is costly, but if you don’t have time on your side, you may need to rely on third-party infrastructure to grow at scale.
Ultimately, it’s about weighing up the costs between building it yourself and employing people that have to maintain it or accelerating the process through digital partners. A lot of businesses who want to launch quickly rely on third parties in order to digitise faster.
What kinds of tasks can virtual partners manage for fintech companies, and which areas seem to be most popular in the sector and why?
In the BaaS sector, there are multiple facets within a company that digital partners can manage: user interface, compliance, payments operations, customer support, and treasury to name a few.
The most popular ones tend to be those which require more nuanced data – which is consolidated into a single service – or those which are low-risk to the business plan such as customer support or cloud-based infrastructure.
Are virtual partners just a stop-gap until the sector matures? Or are they here for the long haul?
As a general principle, they’re here for the long haul. Consumers expect a certain level of service and for fintech companies to remain competitive, they need to utilise the functionality that is available. Although, digital partners need to be carefully selected based on the business model and assessing the requirements of the company and how the industry operates.
It is, however, important that a balance is struck in order to avoid becoming over-reliant on providers and, as a result, being unable to differentiate from other companies using the same providers – if one company is employing the service, so will many others. Meeting market expectations is key but fintechs also need to be agile and progressive whilst ensuring that partners are meeting ever-rising standards by re-evaluating the service they provide. It’s about finding an equilibrium between meeting market expectations but also establishing your own competitive advantage, separating you from the pack.
Outsourcing to virtual partners is often essential for small startups – but what about more established companies?
The incumbents need to continue to develop and progress at the same rate. Some banks for example still have processes that are often clunky and archaic, and they’ll need to start meeting the service levels set by more agile fintechs if they are to compete directly by either innovating themselves or partnering with those that are already doing it.
What challenges do companies face when deciding to work with a virtual partner?
Working with a digital partner does mean releasing a degree of control, which can be daunting to business owners in the sense that doing so can create strategic, financial and operational risk. When partners roll out new releases, there can be cumbersome technological integration work to do which can derail other priorities, or further yet, partner downtime can cause significant disruption with limited operational remedies immediately available.
Are incumbents more or less likely to entertain the idea of a virtual partnership than they were a decade ago?
Incumbents are displaying a great acceptance to embracing digital partnerships compared to a decade ago – we’ve seen a number of big banks acquire fintechs over this period for this reason. The outdated infrastructure of old banks no longer aligns with the consumers priorities of agility and easy banking. Customers now want everything at their fingertips, instant service, fresh new apps that have innovative values and go beyond the traditional offering.
Klarna is a great example of an exciting fintech that revolutionised the market through the offering of instant credit that the traditional banks couldn’t at an appealing point in the customer’s purchase journey. This type of innovation is why some incumbents are now losing out to new fintechs that are offering quick and easily accessible products meaning the only choice they have is to entertain new market entrants.
Technology is moving so fast that often, it is more cost-effective to outsource rather than constantly update internal systems. Do you see a time when M&A and the merging of partners become the more popular solution?
M&A will become a solution but it won’t be the only one. In order for M&A to be successful, it’s important to identify target businesses with aligned strategic values and culture otherwise the theoretical benefit attributed to the transaction won’t be realised. In the absence of that alignment, fintechs will need to identify other means of funding growth opportunities.
What is the future of vistual partnerships in terms of the next decade? Are they a trend or a growing fixture?
Digital partnerships are here to stay. Fintechs epitomise agility, new ideas, innovation, and freedom to express themselves but ultimately, they want to create something that they think is going to be of value. Those that get it right will have the incumbents leveraging that service offering or will become industry leaders in their own right.
About Will Marwick. The CEO of IFX Payments, a leading global foreign exchange, payment and financial technology provider that was founded in 2005, Will Marwick has 10 years industry experience as well as qualifications in Law and an MBA from Imperial College Business School