10 minute read 23 Mar 2021

Collaboration at the core: evolving partnerships between banks and FinTechs

By Jeroen van der Kroft

EY Netherlands Partner Financial Services Consulting

Transformation leader helping clients transform and sustain improved business performance.

10 minute read 23 Mar 2021

Collaboration between banks and FinTechs is evolving, driven by the rise of digital ecosystems, regulatory changes and increasing customer adoption.

In brief

  • EY and Rabobank co-investigated the evolving collaboration between banks and FinTechs.
  • For FinTechs, drivers to cooperate with banks are the established client base, the stamp of trust, the investment budgets and (internal) know-how.
  • For banks, drivers to cooperate with FinTechs are to enable a seamless digital customer experience and to benefit from their technological advancements.
  • Platform-based business models are emerging, exploring collaboration between banks and FinTechs without making large financial commitments while providing a seamless experience for the customer.

FinTech companies are driving the development of new business models in the financial sector through platforms and ecosystems. Regulatory requirements are redefining the boundaries of the banking industry and are widening the scope of products and services. However, banks are still more strictly regulated and face barriers to innovation, whereas FinTechs operating in the B2B sector are typically highly agile technology players that operate outside of the regulated domain.

The COVID-19 pandemic has triggered further digitization in the financial sector. The number of physical interactions has decreased, and customers are increasingly accustomed to arranging their financial needs online, resulting in changing customer expectations. In addition, FinTech banking companies are starting to obtain full banking licenses. Some examples include digital-only banks like N26, Adyen, Solarisbank and Revolut.

The changing regulatory landscape and digitization are driving greater connectivity between organizations and reshaping the financial ecosystem.

The adoption of FinTech services increased to 64% globally

Customer behavior is evolving along with global developments, resulting in customers’ increased willingness to use FinTech services. The EY FinTech Adoption Index shows that the adoption of FinTech services has increased globally from 15% in 2015 to 64% in 2019[1].

Within Europe, Dutch customers are embracing FinTech services the most, with an adoption rate of 73%2. This provides collaboration opportunities for FinTechs and banks in the Netherlands, as new services are likely to be embraced by Dutch customers. Solutions should be developed that meet the needs and expectations of Dutch customers.

Figure 1. Consumer FinTech adoption index, 2019

Figure 1. Consumer FinTech adoption index, 2019

Despite the increasing customer adoption rate, FinTech companies often struggle to form a solid client base. With high acquisition costs per customer, we see that many FinTech companies pivot into a B2B2C relationship or immediately focus on business services. This trend is also visible in EY’s monthly PSD2 data analysis, which shows that approximately 57% of the PSD2 licenses in Europe and the UK are focused on B2B (data up to January 2020). EY research on the Dutch FinTech sector shows that partnerships with financial institutions are viewed as the second greatest opportunity by FinTechs, after international expansion[2].

Figure 2. PSD2 licenses in Europe and the UK, January 2021

Figure 2. PSD2 licenses in Europe and the UK, January 2021

Multiple global developments create a clear need for collaboration

FinTech companies are eager to cooperate with banks for four reasons. First of all, banks generally have a more well-defined and stable client base. Next, a partnership, cooperation or collaboration with a bank is a stamp of trust that confirms the credibility of these FinTech services to the customer. A third reason is that banks tend to have bigger investment budgets that can provide a flow of capital to further develop FinTech services. Lastly, banks have a lot of internal know-how and knowledge in areas that FinTech firms can benefit from, such as legal and regulatory (e.g. Client Due Diligence) compliance and risk management.

Banks, on the other hand, have two main drivers to collaborate with FinTech companies. Customers have become increasingly used to a seamless digital experience and expect the same from their bank; a service few banks are able to provide (yet). Furthermore, due to the emergence of these one-stop-shops, FinTech companies have moved from being just a single service provider to providing a whole suite of services.

This shift to platform-based business models and an ecosystem set-up provides banks with various opportunities, if they decide to enter into these collaborations. Strategic partnerships have led to growth of the Banking-as-a-Service (BaaS) market, in which third parties can connect directly with the banks’ existing and well-regulated infrastructure, in order to provide a seamless customer experience. Moreover, regulatory possibilities, such as PSD2, give FinTech companies the possibility to directly integrate with traditional banks and share their technology to their mutual benefit.

Banks and FinTech companies cooperate in various shapes and forms, with the level of financial commitment as foundation

So, how to choose the right model for an effective collaboration? Unfortunately, there is not one right answer. We have identified important factors to consider before entering into a collaboration. This includes financial dependencies, brand and reputational aspects, responsibilities, operational dependencies (e.g. level of integration versus separation) and the level of involvement from management.

Many FinTech partnerships are based on financial commitments, for example via venture funds, mergers and acquisitions, varying from minority stakes to full acquisitions. 2019 was a record year in terms of merger and acquisition activity for the whole FinTech sector. After a promising start in 2020, FinTech M&A activity slowed down considerably in March due to the impact of COVID-19[3]. Yet the structural catalysts of deal-making, such as the need to increase scale and add new capabilities remained in place. M&A deals in 2020 were mainly focused on direct investment in payments, RegTech, WealthTech and automation. Bank venture funds also narrowed the focus on technology innovations that add value to the core business lines of the bank.

With the rise of ecosystems, EY sees FinTech partnerships with no or little financial commitment more frequently. Banks are investing in incubation or acceleration programs to engage with FinTech companies at an early stage. Increasingly, they invest in innovative collaboration models, based on reference and licensing models. These models enable the banks to offer FinTech solutions via their own channels or are platform-based, by referring to FinTech offerings on the bank’s platform or by offering white labeled FinTech solutions under the bank’s brand via a license structure. Besides the increase in offering FinTech services and products, banks are also increasing the in-house development of financial technologies and digital service offerings via innovation centers and labs, to be distributed via their own- or third-party platforms.

Key challenges for an effective collaboration are cultural gaps, getting the bank ‘grade’ ready and scaling and legacy from a technological perspective.

While the opportunities for collaboration and M&A in the FinTech landscape are numerous, both banks and FinTech companies perceive engaging in such partnerships to be very challenging. Key challenges are related to:

  • Culture: One of the biggest challenges to collaboration is the gap between FinTechs’ innovative and entrepreneurial mindset and way of working versus the more risk-averse and traditional culture of incumbent players.
  • Bank ‘grade’ ready: Having the appropriate controls, processes and policies in place to pass bank assessments on compliance, legal, risk and procurement level, can be challenging and very time consuming. After facing these hurdles, FinTechs also have to deal with various challenges related to sales and marketing. It is not uncommon to have long timelines (>18 months) for developing a POC from Lab to Live, which is a constraining factor for FinTech companies.
  • Scaling & legacy: Many banks have large legacy IT platforms that need to be updated and maintained to conform to changing regulations, to support growth and cost optimization initiatives. At the same time they need to enable integration with emerging technologies at scale. This requires a shift from IT spend on maintenance of legacy systems to building the capability to run a scalable agile business model and the ability to integrate new financial technologies e.g. via the use of API’s.

Regulatory changes and digitization accelerate the rise of digital ecosystems

EY experienced that an essential factor for effective collaboration is the need for coexistence and codependency. Both parties need to have clear collaboration incentives and the right sponsorship and stakeholder commitment to support the collaboration. Alignment between the incentives and strategic objectives of both parties is key to design effective partnerships around genuinely complementary capabilities. This form of collaborating mostly occurs through corporate venturing, leveraging capabilities from both parties and aligning incentives.

The success of a collaboration also depends on the flexibility and agility in business and IT as well as internal process maturity to adopt and implement new technologies. Stakeholders from these different domains should be involved from the start.

From the bank’s perspective, establishing a central innovation team that drives the activation, with linkage into different business units, ensures that the FinTech becomes integrated in the right place with the right support.

Case study from Rabobank

Rabobank digitized its customer onboarding journey via a partnership with Signicat, a Norwegian FinTech

Back in 2017 the market for Digital Identity Service Providers was opening up after iDIN, the identification counterpart to iDeal, started to gain traction. To that extent and to provide a wider array of services, Rabobank partnered with Norwegian FinTech Signicat, a company that focused on providing digital identity services and solutions. At the heart of the collaboration was the creation of a more customer-friendly digitized experience for clients. Through what is now called Rabo Identity Services, the partnership helps businesses to easily onboard their customers digitally, offering a range of digital identity services and log-in options.

Signicat offers a myriad of identity solutions, such as digital identifying and digital signing, compared to on top of iDIN. This, to this day still unique, offering proves to be extremely beneficial for both parties, combining the technological savviness of the FinTech with the well-regulated network of the bank.

The partnership takes the best of both worlds, offering Signicat’s technical capabilities to a wider audience and providing the relatively small FinTech with a large amount of credibility. Even though the FinTech market has become an establishment in itself, large corporate clients still remain hesitant to enter into partnerships with small names. In this instance, next to providing Signicat with market knowledge and a platform to grow from, Rabobank provides an established, reliable brand, thereby making an indirect partnership between large corporates and FinTech companies like Signicat possible. This trend will continue, underlining the need for well-functioning collaborations between banks and FinTech companies. 

The emergence of platform-based business models will accelerate collaboration

Looking ahead, EY and Rabobank foresee that digital ecosystems will encourage industry convergence between FinTech challengers, incumbents and non-financial services companies, who are expanding their customer offerings into financial services. Together they need to create webs of collaborative relationships, against a context of continued change and innovation, replacing the traditional bilateral partnerships.

Collaboration between banks and FinTechs will thrive with the rise of digital ecosystems and platform-based business models. Banks need to be highly engaged in developing a strategy and business model to collaborate with FinTech companies, via participation in or the creation of digital ecosystems. We expect this will become the dominant model for the delivery of financial services, as it will drive a more customer centric go-to-market strategy. The use of Application Programming Interfaces (APIs) enables the sharing and co-creation of solutions between banks and FinTech companies. This ‘plug and play’ platform collaboration enables banks and FinTechs to explore the collaboration without making large financial commitments, while providing a seamless experience for the customer. To ensure a future proof business model it is paramount that the listed factors for effective collaboration, like the right sponsorship and incentives, are addressed by both parties. Moreover, getting to know the company, people and product behind the brand is key for a successful and sustainable collaboration.

I’d like to thank Simon Olive, Senior Relationship Banker – FinTech Sector Coverage Rabobank Financial Institutions Group, Jeroen van Linschoten, Director – Transaction Banking Rabobank Wholesale Clients Netherlands en Folkert de Jong, Associate at Rabobank Financial Institutions Group as well as Lysanne Jurjens, Senior Manager Business Transformation, EY NL FinTech Lead and and Nikki Paes, Senior Consultant Business Transformation for their valuable contribution to this article.

Summary

Collaboration between banks and FinTechs is evolving, driven by the rise of digital ecosystems, regulatory changes and increasing customer adoption. A collaboration with a bank provides FinTech companies with a stable client base, stamp of trust, access to capital and know-how. Banks profit by ensuring a seamless digital customer experience and the integration of new technology. Collaborations come in multiple forms with varying financial commitments. Banks are increasingly investing in innovative “plug and play” collaboration models. These models enable banks and FinTech companies to explore the collaboration, in terms of culture, business processes and IT, without making large financial commitments while providing a seamless experience for the customer.

About this article

By Jeroen van der Kroft

EY Netherlands Partner Financial Services Consulting

Transformation leader helping clients transform and sustain improved business performance.