When is the right time to partner with fintechs and when should you buy them out?


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1st July 2021

Collaborations between large financial institutions and small, agile fintechs are an important part of today’s banking ecosystem. Fintechs can help banks deliver service or functionality to customers at pace. And while many fintech start-ups dream of that first big partnership, banks face a dilemma: when do you know when the time is right to partner with a fintech, and when should you attempt to buy it outright instead?
That was one of the topics of discussion at last week’s Open Banking Summit, particularly during the live panel session entitled ‘Open Banking Partnerships: Collaboration vs Competition’. According to Grant Thornton, the volume of M&A activity in the UK’s fintech space alone enjoyed a resurgence in the second half of last year. The accountancy firm expects M&A activity to “heat up” in 2021.
Against this backdrop, the consensus from our panel was clear: partnering with fintechs is still an important part of doing business.
“Collaboration is absolutely key,” says NatWest Business Lead Lynsey Hunt. “When open banking came into force, [NatWest] spotted the opportunity to launch a payment initiation service, which we’ve now called Payit. To do this, we had the ambition to be the first high-street bank to launch that service and to achieve that speed we partnered with a fintech called Pollinate. They were able to build it quickly and away from our legacy bank stack, so we weren’t getting stuck behind the legacy bank stack changes. It enabled us to do something really quickly and deliver a great service.
“On the flipside, obviously there’s massive competition out there but it’s something we really welcome. Naturally, there’s a lot of competition in international payments or new current accounts for example, but in turn that helps us really push our new services, test and learn different approaches and ultimately give a better customer experience.”

Onboarding pain-points

Aruna Bhalla, who is Partnership Delivery & Customer Experience Lead for another of the UK’s high-street banks, TSB, agrees. “I think banks and fintechs are working really, really well together,” she tells MoneyNext. Bhalla points out that, for fintechs, who have much leaner workforces and as entrepreneurs are used to getting things done methodically and efficiently, the onboarding process of starting a new partnership with a large bank can be really daunting.
“From a TSB point of view, we’ve really started to see the value that fintechs can bring to the organisation. We’ve been working very closely with them to build our new sourcing process so when fintechs want to work with us, we’ve got a state-of-the-art process that they go through so that we can get them onboarded quicker. Typically, fintechs would see 80 or 90 pages of legal documents; we’ve been working with our legal team and got them down to really slick ‘introducer’ agreements so we can get the partnerships up and running. I definitely think we’re working together – we can see the value that they bring to our customers through their products and services, but also they see the value that we can bring through our growing book of customers.”
From a fintech’s point of view as well, partnering with a large incumbent institution can be of significant value. Iana Dimitrova, Chief Executive of OpenPayd, explains: “From the fintech side of things, we absolutely believe in the value of collaboration. The fact is that we can qualify OpenPayd as a fintech – we are a digital banking-as-a-service provider for corporates and as such we still rely very heavily for access to the traditional payment rails to banks. From that perspective, I think that collaboration is absolutely key – not just for the development of the fintechs but also for delivering service to our customers, whether that is consumers or corporates.
“We have to consider that, with the pace of innovation across the sector, it’s absolutely impossible for any company to build all products and services and features. That’s equally valid for large banks like NatWest as well as for new fintechs that are just developing their product offerings. Collaboration is the key. And, as we see, the demand from customers and from consumers is for more collaboration, more sharing of data, more sharing of transaction history, which ultimately results in better consumer and corporate experience when it comes to payments and banking.”

When is the time to acquire?

The balancing act that many banks and fintechs face is when to partner up, and when to go all out by acquiring the smaller company outright. Often an acquisition happens when a bank and a fintech have been working together already; sometimes it comes out of the blue and offers a real signal of intent from an incumbent bank about the next service or functionality they intend to offer.
As Lynsey Hunt from NatWest confirms, it’s never a straightforward decision and you can only predict which is more suitable on a case-by-case basis. “When does that tipping point come? It’s a really good question. I guess it really depends on business strategy, goals and customer needs and our ambition around the market at that time. There’s no one straight answer to that.”
Perhaps in many examples, the answer lies in one word: exclusivity. Hunt gave the example of FreeAgent, an invoicing and accounting platform that was acquired by RBS, which owns NatWest, back in 2018. By integrating FreeAgent within NatWest online banking, it was able to offer all of its business current account holders new functionality like business snapshots, one-click tax filing and other smart tools for free. This obviously gives NatWest a competitive advantage over its rivals, as it has the potential to make FreeAgent’s functionality exclusive for its customers.
By acquiring fintechs that offer functionality targeted directly at an important consumer segment, banks can improve their appeal to prospective customers. Outside the banking space, Amazon this week announced the acquisition of encrypted messaging app Wickr, which is popular with US government agencies, as AWS looks to secure more government contracts for its cloud computing services.
With such a competitive battlefield in terms of banks providing new functionality and better digital experiences to consumers, it’s no surprise that M&As between banks and fintechs are predicted to grow.

Advice for aspiring fintechs

What advice is there for fintechs who are looking to partner with an incumbent bank and get their service in front of a much larger customer base? We’ll leave that final word to Iana Dimitrova, Chief Executive of OpenPayd.
Dimitrova says: “First of all, have patience, I’d start with that – and a very good understanding of what the requirements of your own and your customers’ businesses are. You really have to prioritise. Is it a digital-first offering that you’re looking for, which probably may somewhat limit the choice of banks unfortunately at this point that you can go to as a new, aspiring fintech. Is it the procedure around onboarding and the timeline of onboarding with a particular bank, because anyone that is looking to go into the fintech business and partnering with a big bank has to be fully aware of the process around building that partnership. Every bank is creating a very deep understanding first of anyone that they are onboarding, and that frankly does take quite a lot of time and effort. Understanding what that process involves, and what the timelines associated with it are, is absolutely critical.
“From there onwards, frankly making sure there is clear alignment on the appetite of the bank in terms of the type of customers in industry verticals that the bank is willing to service, and making sure that your business models is fully aligned with that. If you think that you can use – say – a relationship with a NatWest or a TSB to service the up-and-coming and now very fast-paced growing crypto industry, but this is not aligned with how your bank feels about the crypto space, well frankly you would lose a lot of time and effort to integrate and go through a very lengthy diligence process to not really get, in the end, the support and the services that you required. Make sure the technology is there, and make sure you have full understanding and alignment on service and business appetite.”
You can hear more from our panellists on the topic of fintech partnerships by watching the full live session on demand here: Open Banking Partnerships: Collaboration vs Competition.