Partnerships have emerged as a compelling avenue for financial institutions of all sizes to engage in collaborative ventures with startup entrepreneurs, fintech firms, and small business owners. The overarching objective of these partnerships is twofold: augmenting revenues while enhancing the overall customer experience. A notable benefit for financial institutions, particularly in collaborations with fintech entities, is the access to cutting-edge technologies and software solutions without the need for independent development or implementation. Concurrently, partnering companies expand their product offerings, enriching the value proposition for their existing and potential clientele.
This article provides an overview of the fundamental aspects of bank partnerships and provides insights into best practices that financial institutions should consider when selecting their next strategic partner.
Understanding Bank Partnerships
Partnerships have been a fixture of the banking industry for decades. While these partnerships encompass various configurations, a significant percentage today are made between a financial institution and a financial technology (fintech) company. One PWC study suggests that 42% of operational banks were engaged in partnership arrangements with fintech companies, a number that is likely to increase.
For financial institutions, a bank-fintech partnership serves as a conduit for exploring innovative technologies with reduced risk. Third-party technology providers introduce banks to sophisticated digital solutions that integrate with existing systems, thereby enhancing the customer experience and operational efficiency. The salient values of such partnerships for financial institutions encompass:
- Enhanced Digital Offerings: Elevating the spectrum of digital products available to customers.
- Increased Customer Engagement: Augmenting customer engagement and transactional volumes.
- Operational Efficiency: Streamlining internal processes for improved efficiency.
- Attractiveness to New Business Clients: Enhancing appeal to new business customers and prospective fintech partners.
For non-bank partners, the right alliance can yield substantial benefits. Fintech companies can bolster annual revenues by diversifying services and financial product offerings to their clientele. A well-suited financial partnership allows these businesses to introduce enhanced services, such as exclusive debit card programs, online banking solutions, cryptocurrency options, and discounted interest rates on loan products.
Beyond financial gains, fintech partners also gain from the bank’s expertise in navigating government regulations and compliance requirements. The rigorous due diligence undertaken by banks can facilitate access to FDIC insurance and regulatory approvals with reduced financial burden for fintech firms.
Categories of Bank Partnerships
The selection of a partner hinges on the short-term and long-term objectives of both the financial institution and its non-bank partner. Formal agreements in banking typically fall within the following categories:
- Operational Partnerships: Structured to leverage products or services provided by fintech companies to enhance existing processes or infrastructure within the financial institution, aiding customers with onboarding, automating business loan processes, fraud detection, and ensuring regulatory compliance. AI has strong potential in this space, however there are significant risks involved with unsupervised AI use using current models, so compliance and audit oversight is recommended.
- Customer-Oriented Partnerships: Focused on improving existing banking functions, such as online deposits and business account openings. These partnerships feature innovations like teller video chatting and person-to-person money transfers and can increase a community bank’s footprint beyond its geographical locale. However, financial institutions must be cautious to implement secure protocols when entering these types of partnerships, as they are liable for security breaches.
- Banking-as-a-Service (BaaS) Partnerships: Also known as front-end fintech agreements, these involve non-bank partners interacting directly with banking customers to facilitate routine online transactions. In some cases, customers may not even know that the bank is involved. This is the fastest growing type of partnership in today’s market. The goal of a BaaS partnership is to increase deposits, diversify lending, and grow revenue streams. Banks interested in engaging in this type of partnership must plan for a rapid increase in customers and have contingency plans in place to should the partnership end.
Illustrative Instances of Successful Bank Partnerships
Exemplary partnerships since 2020 provide valuable insights for banks and non-bank partners embarking on new collaborative endeavors:
- Stride Bank and DoorDash: In 2022, this alliance enabled DoorDash drivers to access a prepaid Visa debit card with a 10% cashback incentive on fuel purchases.
- Citibank and PayPal: Commencing in 2020, this partnership allows customers to deposit funds directly into their PayPal digital wallets.
Selecting the Right Partnership
While bank partnerships undoubtedly generate value for all parties and their clients, making the right choice can be complicated. Before formalizing any agreement, both the financial institution and non-bank partner should engage in comprehensive due diligence. This diligence should encompass the following five crucial aspects:
- Financial Status: Including a sensitivity analysis to assess the viability of the partner in an evolving ecosystem.
- Experience: Evaluating operational history, business model, and consumer reviews of the partner company.
- Regulatory Compliance: Verification of organizational documents, business licenses, and registrations.
- Cybersecurity: Analysis of the partner’s security framework, specifically concerning data security controls and incident response capabilities.
- Risk Management: Evaluation of potential partner’s risk policies, encompassing risk management training and procedures.
While bank partnerships, particularly with fintech firms, are gaining prominence, financial institutions should contemplate alliances only with third-party entities where mutual benefits are evident. In particular, benefits related to enriching the customer experience and increasing annual revenues. However, thorough due diligence is imperative, encompassing assessments of experience, risk policies, and information security frameworks. Collaborating with experts in banking technology, such as Biz2X, can significantly enhance the due diligence process for both parties.