Why Bank-Fintech Partnerships Fail, and How to Prevent the Embrace of Death

Coined by MIT researcher Alan Thorogood, the phrase “death’s embrace” refers to a situation in which the mismatch between bank and fintech priorities and their relative speeds results in over-indexing of fintech assets and failure to achievement of fintech strategic objectives.

Fintechs thrive when they move quickly and through “consistent growth in customers, funds and transactions, which in turn makes it easier to raise capital and scale their products and businesses,” says Scott Simari, principal at Sendero Consulting.

Banks, however, are moving slowly because they need to maintain compliance, manage risk and prevent product cannibalization, Simari said.

“It’s the endless errands, meetings, toll booths and reviews, often a lot of activity and strain on fintech resources without significant productivity. From a fintech perspective, it’s an opportunity cost problem; the time and resources spent on support the financial institution could be better used to achieve its strategic objectives,” he said.

There’s a lot to be said about the benefits of bank-fintech partnerships and how they can drive the financial sector toward innovation. There’s also a lot that can go wrong.

Lots of talk, no money

For banks, one of the worst things that can happen with partnerships is investing in a relationship with a fintech that bears little fruit. For example, loan productivity and loan volume are top priorities for banks seeking fintech partnerships, but only 28% of banks report seeing a 5% or more improvement in these areas, according to research.

Source: Cornerstone Consultants

Creating effective partnerships is difficult: banks must spend a lot of time vetting potential partners and then integrating their technology into their core and ancillary systems. In addition to technical issues, internal bank red tape can also delay time to market.

This barge movement may lead to delays or inferior results for the bank, but for the fintech it can be comparable to a death sentence.

The partnership processes to pay attention to

1) The Compliance Maze: For banks, compliance is an unloved but necessary part of their operations, which means a fintech can find itself spending a lot of its time ensuring it meets standards and, conversely, less time on activities that will help the fintech grow. “Capital raising is intense; eighty percent of my time is spent on that,” one fintech founder told Thorogood in our research.

2) The regulatory drag: “Large institutions’ stringent regulatory requirements and risk management protocols can disproportionately consume fintech resources, leaving them with limited bandwidth to innovate and iterate on their platform,” Simari said.

These processes not only take time away from capital-raising capabilities, but also leave fintechs with limited resources to spend on improving their offerings. This stagnation can be dangerous, especially if the fintech is partnering with a very large and well-known bank. “A fintech can risk having its identity overshadowed by the financial institution, resulting in a loss of autonomy and strategic direction,” he said.

How to avoid the embrace of death

The embrace of death is not good for either partner. While the bank may initially benefit from the fintech devoting a large portion of its resources to the relationship, the stagnation that the fintech may experience because of this affects the benefits a bank can achieve in the future. Avoiding an overly taxing partnership like this is the best policy:

1. Start independently first: Partners can consider standalone launches rather than diving in and integrating products with enterprise platforms. “This approach facilitates rapid market entry, allows for easy assessment of value and allows for direct separation if necessary,” Simari said.
2. Keep tabs on your riflescopes: The embrace of death is more likely to occur if the scope of the partnership increases very rapidly, leading to “dependence on various business functions,” he said. Expanding the mandate of the partnership may cause delays and internal conflicts, as well as increased costs for the IF. Therefore partnerships should start small and with clear objectives from day one.
3. Set boundaries: According to Simari, fintechs should clearly define the relationship, distinguishing between a strategic partner and a transactional one. This allows both partners to start the value matching process early in the deal and mitigate any risk of the relationship becoming too much for either partner to bear.

“Transparency from fintechs about their current capabilities is essential, avoiding the temptation to oversell future product developments,” Simari said.

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