Expleo on fintechs working with banks: a guide to overcoming the pitfalls
Following the UK Department for International Trade’s UK fintech State of the Nation Report in May this year, Kate Cordell from Expleo offers advice to fintechs on best practice when working with traditional banks.
Banks and fintechs are increasingly in need of each other. For incumbent banks, the adoption of new technology is business critical in the face of changing customer expectations and increased competition from more agile challengers. For start-ups, limited audiences and market consolidation is making partnership more attractive than going alone. But integration is rarely straightforward, especially when it brings two such different cultures together.
The finTech industry has matured in recent years, creating new business dynamics that call for a more peaceful approach. Meanwhile, banks are building their own technology to get ahead of competition and fast-track innovation, with 56% of traditional financial institutions having put disruption at the heart of their strategy, according to the UK Department for International Trade’s UK FinTech State of the Nation Report which came out in May 2019.
Nonetheless, banks still face limitations that fintechs can solve. Fintechs can help banks engage younger audiences as well as deal with the challenges presented by re-architecting both the technology stack and their operating models. Fintechs that help banks to navigate regulation and monetise their customer data may enjoy considerable success themselves.
For fintechs, the security of partnering with an incumbent has become more attractive, given the growing number of start-ups and the shrinking number of opportunities. Fintechs are also finding their ambitions curbed by the dominance of the big high street banks. By joining forces with the banks, fintechs are better positioned to access the global mass market.
Are we therefore moving into the era of co-disruption?
82% of incumbent banks expect to increase fintech partnerships in the next three to five years. Lloyds’ decision to partner with Thought Machine (TM), to accelerate and ease the pain of digital transformation, is an interesting indication of where the market is headed. Lloyds will migrate 500,000 customers onto Vault, TM’s cloud-native core banking technology.
ClearBank, the UK's first new clearing bank in more than 250 years, aims to compete on price, because its cloud-based tech platforms are unencumbered by labyrinthine legacy systems. Fintechs that can offer the golden combination of lower cost and reduced friction to banks will find a willing partner.
However, the practicalities of working together are less clear cut. Given that many fintechs were conceived as an alternative to traditional banks, how can these potential competitors come together?
Expleo has identified five major hurdles that need to be crossed before fintechs can reach the finishing line:
Challenge #1: How to improve your ecosystem
With competition increasing, it can help to meet the right person on their terms by getting involved in accelerators and innovation labs. Collaboration with an organisation that already works closely with banks can help secure privileged access to potential partners and give an insight on their pressing issues.
Challenge #2: How to progress within the bank’s culture
Slowed down by legacy systems and bureaucracy, banks can lack the internal processes to fast track the embedding of new solutions. In the eyes of the fintechs, they are following a more convoluted route than necessary, but this is due to the complexities of scale. This is frustrating, but also largely unavoidable – fintechs should prepare to reset their watch.
Challenge #3: How to tackle regulation, compliance and cybersecurity
The bank’s need for control can feel bureaucratic, but those restrictions are there to deliver a high quality, stable product. Fintechs that underestimate the enormity of milestones or the need to demonstrate the right depth of due diligence, run the risk of losing the confidence of both the regulator and the market. Fintechs must provide robust evidence that their tech is fit for purpose, differentiated and will address the customer need.
Challenge #4: How to manage change with structure and agility
Capability modelling, target operating models and process mapping can be low on a fintechs's to-do list, but they provide valuable infrastructure for smoother progress. For example, a lack of governance of the ecosystem and processes can lead to poor visibility on the project. The right management consultants will be able to help both sides to prepare for the business change impacts from merging two very different cultures.
Challenge #5: How to prepare for scaling up
The pressure to expand a successful pilot and demonstrate proof of value as soon as possible can lead to rapid growth that causes your architecture to creak at the seams. Having a focus on quality in design stages will provide confidence to the bank that your technology will be successful at scale. Quality in design means paying careful attention to how the solution will be tested and proven – if this is overlooked it can be difficult for the implementation teams to evidence the quality of the solution before it goes into production.
Learn from experience, not your own mistakes
Disciplines such as stakeholder management, compliance, quality management and change management are critical to a successful partnership with a bank. For fintechs without expertise in these areas the right third-party support can save considerable time and effort.
Entrepreneurs are naturally inclined to take on everything themselves. When things go wrong, they can end up calling for a ‘white knight’ to ride to their rescue and get the deal back on track.
Therefore, it may prove more cost effective to engage a ‘black knight’ that can help you navigate the most common pain points in a proactive way. Why learn from your own mistakes, when you can benefit from another’s experience?
Read the full fintech report here.
Stripe backs Step - the digital bank for teens
The Series C round raised US$100m in capital from a number of backers, including Coatue, TikTok star Charli D’Amelio, actor Jared Leto, and Will Smith’s Dreamers VC, for the enterprise.
Step provides a free FDIC-insured bank account and Visa card to teenagers. The accounts are backed by Evolve Bank and there is no subscription charge for its usage. Users don’t pay for their accounts and there are also no overdraft fees.
The mobile banking app enables parents to set controls and limits on spending and encourage responsible finances. According to data released by the company, 88% of the platform’s users say this is their first bank account.
To date, Step has seen great success in the marketplace. The company has raised more than $175m from investors and now has 1.5m users.
Stripe, which was founded by Irish brothers Patrick and John Collison, previously led Step’s $22.5m Series A round in 2019.
Step's Series B funding round also brought in $50m, and has a distinctly celeb-tinged reputation with investors including Justin Timberlake and the pop duo The Chainsmokers.
Users get access to a free, FDIC-backed bank account, a spending card and P2P payments platform to send and receive money instantly.
CJ MacDonald, chief executive of Step, said the company is aiming to improve the financial futures of the next generation. “Step is the only banking platform that enables teens to start building a positive credit history before they turn 18 and does not charge fees of any kind.
He has previously spoken about the importance of financial literacy for young people. “Money is just one of those things where I think the more educated and equipped you are early, the better decisions you can make down the road,” he told . “And you can also prevent yourself from making costly mistakes. I mean, the average American doesn't have $400 in emergency savings and pays $350 a year in banking fees. If we can help this next generation just ultimately be smarter and more educated as it pertains to money, I think we'll all be better off.”
Kyle Doherty, managing director at General Catalyst and Step board member, explained, “Gen Z is flocking to modern financial solutions that can be easily embedded within their digital lives and Step has a unique model for how to do this right.”
The news follows on from Stripe’s recent announcement that it plans to acquire TaxJar. The fintech, which builds software for online businesses that automates the reporting and filing of sales taxes, will most likely be integrated with Stripe’s billing services.
Currently, No terms have been disclosed but the Boston start-up had raised more than $60m from investors including Insight Partners.
Stripe chief financial officer Dhivya Suryadevara said of the move, “With TaxJar, we will help millions of internet businesses running on Stripe with their sales tax and make it easier for them to sell internationally.”