This year the theme of our Alloy Labs annual member meeting was “The Next Era of Banking”, focused on the seismic fundamental shifts in the banking industry and helping members update their old playbooks with the tools and tactics needed to survive and thrive.
An important part of the new playbook is reframing how to approach bank/fintech partnerships. Yes, we all overuse that term, partnerships. Few relationships with fintechs are true partnerships in the sense of sharing gains and losses proportionally. Some products from some vendors are fungible commodities, with limited upside, but that’s not my focus here.
My focus is on potential relationships with external companies that can bring new features, products, services, and value propositions to customers. Semantics aside, winning in this era requires an approach that has a lot more in common with developing partnerships than merely managing vendors.
Here’s how partnership approaches have evolved and why this era is different:
The Fintech Partnership Eras
The Mesozoic Fintech Partnership Era (prior to c.2008) – The BF (Before Fintech) era. Dinosaurs ruled the industry and you either took whatever customer features and products your core provider allowed you to have, or you built them yourself. Key concern: Build or Buy?
The Paleozoic Fintech Partnership Era (c.2008 – c.2018) The Cambrian Explosion*, of billions of dollars poured into thousands of new fintech lifeforms. It’s also what Jason Henrichs likes to call the era of the FinTech Petting Zoo. As one of our member bank’s CIO put it, “We go solution shopping and hope we solve a customer problem along the way.” Key concern: Who all is out there?
The Cenozoic Fintech Partnership Era (c. 2018 – present) – comprised of two concurrent epochs:
The Pliocene Fintech Epoch – The epoch of technical integration, marked by the proliferation of middleware, sandboxes, APIs, app stores, and infrastructure platforms. Key Concern: How do we integrate with our tech stack?
The Pleistocene Fintech Epoch – Even as the integration epoch continues, a new ice age is upon us, where vendor due diligence, regulatory scrutiny, and enterprise risk management put the slow freeze on partner adoption, especially in the areas of Banking as a Service and embedded finance. Key Concern: How do we stay out of trouble?
The Fintech Partnership Value Era
I suppose I should keep the geochronologic shtick going and call this something like the Holocene Fintech Epoch (roughly meaning ‘whole new era’ from its Greek roots). Jason has already called this the Age of Banking Enlightenment, so as much as we love mixing metaphors, I’m going to stick with plain English for clarity.
What’s been largely missing in these eras, or at least relegated to a lesser concern, is a clear focus on delivering value for customers.
The Fintech Partnership Value Era (for the foreseeable future) – Large extinction events are increasing, and organizations that survive and thrive are those that adapt most quickly to change and focused on building true customer-centricity. Notions like “service” and “relationship” are desirable, but insufficient in this era where differentiation is critical in a sea of commodities. Key concern: How can I deliver real value to my customers?
The Risks We’re Ignoring
Bankers are inherently risk managers, and appropriately so given the leveraged nature of their balance sheets. Yet there are some existential risks hiding in plain sight.
Our industry has well-developed systems for managing well-understood risks such as credit risk, liquidity risk, fraud risk, etc. Not so much for the latent and emerging risks that boil down to two major categories:
External risks from aging customer bases, ever-rising customer expectations, and disruption from competitors from all across an ever-widening spectrum.
Internal risks from business models concentrated on the fragilities of spread income and growing gaps in the talent and ability to bring new sources of value to customers quickly.
Acknowledging and addressing these risks is critical to win in this next era, whatever we call it. Banks have limited levers to pull in terms of value creation by participating in new waves of secular growth or highly asymmetric allocations of resources. Productive partnerships with fintechs can add value by helping banks target strategic customer segments and create unique competitive advantages.
Yes, vendor diligence and risk management are important to protect against downside risk, but banks that can effectively manage partnerships as products providing tangible value propositions to customers will survive the next mass extinction event. Those that do not will end up as minor footnotes in the fossil record.
*The Cambrian explosion of the Paleozoic Era actually happened hundreds of millions of years before the Mesozoic Era, but I was on a roll, and I hate to let facts get in the way of a good analogy.
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JP Nicols is cofounder and Managing Director of the Alloy Labs Institute where he helps leaders create competitive advantage to drive new growth through industry-leading best practices, tools, and frameworks.
He is a top-rated speaker and instructor on innovation, strategy, and leadership at leading graduate schools of banking, and cohost of the Breaking Banks Fintech Podcast , the #1 global fintech radio show and podcast.
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