When Partnerships Fail
Analyzing the Common Pitfalls in Fintech Alliances
Bank-Fintech partnerships are a favored strategy for expansion or growth - for a good reason. These partnerships allow banks to provide more comprehensive and appealing solutions to their customers while not relying on the limited capabilities of their legacy software. They also offer access to markets that could only be reached together, for example: Fintech companies often target niche markets and can help banks access these opportunities without moving away from core markets. Banks usually have customer trust at scale, allowing Fintech companies to deploy their more attractive offerings with a faster adoption rate.
However, these partnerships are quite complex and depend on each (very different) party working in harmony with the others. If these partnerships are not actively managed at each engagement stage, they can unravel, costing both Banks and Fintech firms irrecoverable time and locking in considerable financial loss.
In this article, we break up Bank-Fintech partnerships into three distinct phases, share pitfalls common to each stage, and recommend a few best practices to help these partnerships succeed.
The Lifecycle of a Bank-Fintech Partnership
Every Bank-Fintech partnership has three phases: Formation, Operation, and Evaluation. In this section, we share short descriptions of what defines each.
Formation: This stage covers the selection of each partner through to the commencement of work. The partnership can be initiated by the Bank or the Fintech company. In either case, it is important that both partners' strategic goals and business models align. It's also important that both parties spend time formally understanding each other to avoid misunderstandings about expectations or capabilities.
Operation: In the operation phase, Banks and Fintech firms finally collaborate. They jointly map out their strategic plans for product development and market entry strategies. This is also an important time to establish effective, open communication channels and adequate resource allocation to support operational activities. Lastly, it is mandatory to cover how intellectual property rights and data sharing ensure compliance with the relevant regulations.
Evaluation: Fully in the swing of delivery, the Evaluation phase is characterized by the ongoing management of operational activities. It's about setting up metrics to define success and adapting strategies to the real-world data that can now be mined. A transparent decision-making process for the partnership's continuation, modification, or termination would be valuable as it limits the opportunity for conflict.
Common Pitfalls at Each Stage of the Partnerships
While each phase feels straightforward, each has many complexities and opportunities that could derail the partnership. These, by stage, include:
Formation Failures
Overestimation of Success: Setting unrealistic expectations for a partnership without practical grounding can lead many Banks and Fintech companies to expect immediate success. This affects their management strategies and increases the likelihood of deeming the partnership a failure too early.
Insufficient Due Diligence (on both sides): Bank-Fintech partnerships take a long time to form and can be delayed due to complicated or undefined partnership processes. This places a heavy burden of optimism on the agreement to partner, which can dissuade full due diligence from taking place for the risk of further delays. Not completing the right due diligence can lead to unforeseen hurdles later on - and sometimes even deal-breaker situations, depending on what's been uncovered post-partnership.
Operational Challenges
Technology Integration Difficulties: Banks are renowned for legacy systems, which sometimes reflect a patchwork of technology forced to fit together so that their systems work smoothly. Fintech firms are well known for leapfrogging these constraints and building products with the latest technology in mind. When combined, the potential for these systems to clash is excellent and can sometimes be insurmountable.
Cultural Clashes and Misalignment: Cultural differences between the sturdier banks and more nimble Fintech firms create clashes between the teams. These can delay product development or delivery, costing each partner significantly.
Evaluation Errors
Lack of Predefined Success Criteria: Jointly bringing a product or service to market often happens in too-tight timelines. No agreed metrics of success are decided. This can make it difficult to objectively measure success, leading to a disconnect between partners on how the engagement progresses.
Ignoring External Influences: The business landscape is constantly in flux. Disruptive innovations like AI, geopolitical risks flaring, and continually changing regulations affect the success of any partnership. Not taking these into account can skew a partnership's results and the effectiveness of its strategy.
Best Practices for Navigating Partnership Stages in Bank-Fintech Partnerships
Reviewing the risks of failure in a bank-fintech partnership can make the engagement seem daunting or too difficult to pursue. However, with the right best practices in place, any partnership can thrive.
Take, for example, the pre-partnership due diligence process. An analysis of cultural fit done at the outset can check for alignment on risk tolerance, innovation, and decision-making tendencies. Technological compatibility can be verified immediately to remove the risk that a partnership cannot move forward operationally.
Another area that can be tended to right at the start of a partnership is how to handle communication and conflicts. Communication protocols will help both parties stay informed about the engagement's health. Conflict escalation mechanisms will ensure that any conflicts are handled swiftly and constructively. Regular meetings and updates help for quick interventions when needed and foster a strong culture of collaboration.
Lastly, a regular review and renewal process can help each party stay aligned with the partnership's outcomes. This includes scheduling regular performance assessments to objectively measure progress against the agreed goals, and a partnership agreement review to address any changes in market conditions or regulatory environments.
With structured approaches like these, Bank-Fintech partnerships are about managing risks and leveraging opportunities for mutual growth. They help secure the partnership's success, protecting the original intent: that the Bank and Fintech firm be more successful together than independently.
Conclusion:
Viewing a Bank-Fintech partnership through the lens of 3 distinct phases can help understand and manage the complexity of these engagements. It helps underscore the value of continuously checking for strategic alignment and assessing for operational integration. It also helps understand where the common risks or pitfalls lie. These pitfalls do not have to end a partnership. They can be mitigated by implementing tried and tested strategies, which depend on the adaptability and resilience of both parties.