A few years ago, I posted a guest article from Philippe Gelis, co-founder and CEO of FX firm Kantox, on Why FinTech Banks will rule the world. It was very popular and made my top ten posts of 2015, and Philippe has been kind enough to let me share another of his updates. This one is on banks partnering FinTech firms, something I discussed the other day, but Philippe tells the story from a FinTech firm that has actually been trying to partner with the banks. An interesting experience and learning lessons. Well worth the read ...
Banks and FinTech Partnerships: a Clash of Extremes
“We really like their technology and the unique value they bring to clients. Nevertheless, they recently stole two good clients from us, so we will not disclose any more information and there’s no way that we will partner with them.”
These are the words from the Head of Corporate FX at a German bank that we met with a couple of years ago. He was talking about us.
We had been introduced to him by someone else from the same bank in order to have a discussion about a technology partnership – and this is how the discussion ended. This was also the moment I really started to understand the way most bankers still think, and how challenging partnering with any bank would be.
Since that time we have advanced a lot in terms of our partnerships, however, it hasn’t all been smooth sailing.
Partnership agreements between banks and fintechs are one of the most-discussed topics in fintech; in this article, I’ve summarised a few of the key lessons we've learned during the past two years in the hope that it drives smoother collaboration efforts.
Banking is probably one of the few industries with the highest level of risk aversion. Here, I am not only speaking about their clients’ risk in relation to credit, loans and derivatives, etc., – which is most banks’ core business and the main reason they are heavily regulated – but about how individual bankers approach risk as a career breaker or enabler.
Let me explain.
When you start working for a bank, you almost never build anything from scratch. You are basically inheriting a franchise, a portfolio of clients or products which generate a certain amount of business and revenue. Your role likely includes generating some revenue growth, but first and foremost it’s to protect and maintain that portfolio.
In the old banking world, this franchise was quite stable; you lost some clients to other banks while also gaining some clients from them. All in all, market shares were quite stable – especially considering that most markets are oligopolies with just a few large banking players.
In recent years, the playing field has changed dramatically. Interest rates are close to zero, which is having a significant impact on the banks’ business model. Thousands of well-funded fintech companies have appeared and technology giants have also shown a real appetite for fintech.
Banks know how to compete with banks; they have the same structure, culture and behaviours. Competing with nimble, very fast-moving competitors starts to scare them.
Inside banks, innovation teams are – at best – an entry door to the bank and the matchmakers to the different business lines. Beyond that, they have little influence. They are often incentivised to launch the POC (Proof-of-Concept), but not necessarily to make sure they succeed.
One of my key lessons learned is that navigating banks is very complex. There are many people there whose jobs are basically to spend time speaking with fintechs about innovation – and not much else. Their timelines are also 10 times longer than those of fintech companies and discussions can last forever if you speak to the wrong people.
To avoid slowing down, you need to make sure you quickly identify the relevant business line and speak with someone who holds some kind of internal power or influence. Then, you have to go upward in the hierarchy to make sure you move forward.
In the past five years, I have seen banks’ approach to fintech companies dramatically evolve. Banks now understand that they are unable to keep up with the pace of innovation, so they need to find the right balance between investing in replacing their legacy systems and building new technology internally, as well as partnering with, investing in, and acquiring fintech companies.
“Are you ISO 27001 certified? This is very important for us as we only work with vendors that are ISO compliant.”
When we first heard this question we realised that after several months discussing the business rationale of the partnership, there were some new and completely unexpected requirements to consider.
You might think that it would have been easy to mention the ISO certification requirements early on in the discussions, but the reality is that the people from the business line you are negotiating with are not really aware of IT or compliance requirements. They basically discovered them at the same time that we did.
Banks really are all about silos; you need to secure the green light from each silo to get a deal done.
Inside banks, there is also no single decision maker. No one can decide by themselves to move the partnership forward. You need to convince multiple stakeholders that the partnership makes sense, that it will create significant extra value for both parties, and that the risk of cannibalisation is low. Once that’s done, you then need to convince their compliance department, IT team and legal.
This is what we call the “tick-the-box” moment. You need to almost perfectly fit their processes and requirements, yet must maintain a high degree of flexibility to adapt to them – because they can barely adapt to you.
Kantox is nimble and flexible by design; nevertheless, meeting all the requirements is sometimes challenging and time-consuming. It’s a fine balance between your willingness to adapt to partnership requirements and your willingness to walk away from the deal if the demands are clearly excessive, or if they put your overall business strategy or focus at risk.
“We like your technology but we believe it’s a bit expensive so we will think about it and come back to you.”
In this case, that particular bank never came back to us, however, six months later we saw that they were looking to copy our core product, Dynamic Hedging, and had basically copy-pasted the content of our own website, using exactly the same wording.
I later learned that the person in charge of Corporate FX in that particular bank was under pressure from management to deliver more innovation to their clients, so they took a “short-cut”. Months later, it seems they still have no product on the market and we have never faced them when pitching new clients.
Speaking about innovation is easy, executing is somewhat harder.
When discussing partnerships with banks you are always trying to find the right balance between disclosing enough to make your technology appealing, while not saying too much. I have always believed that vision + execution + speed makes all the difference so I never really feared competition from banks.
In the end, we are a technology company moving at a fast pace, with clients all around the world – therefore banks are not really a threat to us. But to be honest, in the case I mentioned above, I was quite upset when I read the news about their intentions to replicate our product, so I sent them a nice email...
Bank partnerships: takeaway lessons to help you move faster
- Do not look for partnerships, instead engage with banks that are approaching you proactively
- Do not spend too much time with innovation teams, instead navigate ASAP to the business line that makes sense for you, (i.e. Corporate FX or Treasury in our case)
- Check the bank’s partnership record and their appetite. There are so many banks that can build teams which will spend years on partnership discussions without reaching any business outcome
- Try to quickly understand how they perceive you. Do they see you as a business enabler, revenue generator, a way to boost loyalty, to upsell, to better engage clients or to provide an improved UX versus being a potential business cannibaliser? (In the case of Kantox, banks usually feel that we offer unique technology that brings extra value to their clients; we are a differentiator, we increase clients’ loyalty without cannibalising a banks’ existing revenue)
- Be very clear on what you are keen to do and what you will not accept. At Kantox we have always been very clear that we do not want to be a white label, nor a vendor to banks. Our partnerships are based on co-branding
- Engage at the highest level possible with people that have influence inside the bank. In our case, we usually engage with the Heads of Corporate FX, FX e-commerce or FX Products, as well as FX Salespeople to make sure they see the benefit for their own clients
- Do secure a project manager inside the bank to lead the process. This makes all the difference in reducing friction and improving coordination between business lines, IT, compliance and legal. I would say that you should put pressure on the bank to appoint a tech-savvy PM as proof of their motivation to partner with you
- Be patient. Banks are slow to move, particularly at the beginning. Realistically, you should consider allowing at least 12-months from the moment you engage to the moment you have a partnership agreement signed
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...